"It will be those businesses that have taken a common sense approach, with sensible leadership, and are run profitably with cash reserves, that are best set to ride the storm."
FR: As a lawyer, what is your role in the short-term lending market?
To operate in this area, specialist lawyers need a whole lot more than just a one dimensional understanding of property law. In fact, to provide the very best support a lawyer needs to demonstrate deep understanding of contracts, property, litigation, insolvency, as well as the regulatory framework. All of these represent key areas fundamental to any lending business and, as short-term mortgage lending is often used in particularly complex or unusual situations, it’s really important that lenders have confidence that they have robust strategies and documentation in place. It goes without saying they must operate within regulatory and legal boundaries – sometimes those boundaries may not be clear. So, we work in very close partnership with lenders both on a case by case basis, as well as to carefully develop strategies and ideas to help them with originations, collections and future plans. We work with them on an individual basis to craft an approach that tackles the unique considerations for their business, peel away the layers of mystique and uncomplicate the legal framework within which they work.
FR: You have been closely involved in the ASTL’s lobbying of The Treasury. How did that come about?
I’ve held a role on the Executive Committee of the ASTL for some time now and earlier in the year, when the government announced its scheme of payment holidays to be provided by ‘home finance providers’, it became clear very quickly that this would include and disproportionately impact short-term lenders, particularly when combined with the enforcement moratorium in the courts.
A broad-brush approach had been taken to applying a solution aimed to keep people in their homes during a significant public health crisis, which was entirely understandable given the urgency of the situation at the time. But we felt that this would ultimately be detrimental to customers in the short-term lending space and that with more time we would be able to collaboratively create a better-defined approach which would prove more effective for all stakeholders, as well as meeting policy-makers’ main objectives.
In fact, now we have already seen some lenders calling in loans, which we believe is an unintended direct result of government policy, which as I say, was understandably drawn up in haste as the pandemic hit society. So, despite best intentions, there has been consumer detriment.
There is a problem which was never fully recognised at the time. Lenders across all areas of the market have built models for their businesses that assume a certain recovery rate, and when they are unable to achieve this recovery rate or prevented from doing so by such interventions as deferrals/moratoriums for a prolonged period, these models can fail. And when this happens, it becomes no longer just a lender problem, but also a consumer problem. Further down the line, this is likely to result in reduced liquidity in this very significant and important part of the marketplace – something the government is keen to avoid. Policy needs urgent but careful revision and a more balanced approach. For a long time, it seemed that nobody in a position of authority was listening, but we have made some breakthroughs and are starting to have a more meaningful dialogue with HM Treasury.
FR: What are the current challenges for lenders?
The moratorium is a big challenge. It has pushed back a typical recovery process by at least six months, and counting, and this massively changes the picture for lenders on loans which are out there, as well as those that are yet to be underwritten. And this will translate into a bigger backlog so that, when the courts do open, huge delays are inevitable.
Combine this backlog with the limited capacity that the courts will have as a result of working within the parameters of social distancing, and it could potentially add a further three to six months to lenders’ recovery timescales. Only last week, HMCT forewarned longer timelines in the court process.
So, even once it has ended, the impact of the moratorium will continue for lenders. This is significant and is likely to result in a many cases resulting in an interest shortfall, and potentially even a capital shortfall before accounting for adverse property market conditions, which remain a real possibility.
Again, this is not just a problem for lenders but also for borrowers, because consumer indebtedness does not disappear upon realisation. Many lenders are unsure about taking action on their loans in part because of the mismatch between court and regulatory approach delay, but procrastination in practical terms impacts borrower’s equity and potential to retain the property at the end of the process and is rarely the best option. A much better option is urgent thorough review now and a strategy based on case sensitive facts and circumstances. Now more than ever before, replace sausage factory collection with bespoke crafted operation.
FR: Do you think Covid-19 will benefit the market in any way?
In the short-term things are going to be very difficult and we will all need to accept that in the next few months cashflow will be down significantly. It will be those businesses that have taken a common sense approach, with sensible leadership, and are run profitably with cash reserves, that are best set to ride the storm.
In the medium term, however, I think we could see a period of high demand for short term finance delivered expertly and executed professionally. So those businesses that are in a strong enough position now to ride out the current storm, will reap rewards. After all, the high street, we know to be clunky, traditional and often handcuffed, will be late to react to demand, as has been the case in the past, so there’s great potential for the market.
I think we could also see a complete reset of the industry, with a return to common sense-based lending and stakeholder relationships – a more sustainable environment for all of those strong and robust enough to remain. In many ways, I believe this return to basics will reflect a broader reset in society as a whole and this more measured approach which can’t be a bad thing.
FR: If you could see one headline about financial services in 2020, what would it be?
It would have to be: “Treasury finally incorporates industry insights into a balanced decision making process on new policies.”
