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Mortgage market firms and other lending hardest hit by coronavirus – FCA

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  • 07/01/2021
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Mortgage market firms and other lending hardest hit by coronavirus – FCA
Firms operating in the mortgage market and other retail lending spaces saw their profitability and income hardest hit in the financial sector, according to the regulator’s research.

 

Overall the Financial Conduct Authority (FCA) believes 4,000 of the 23,000 financial services firms it regulates are at a greater risk of failure due to the pandemic.

This risk appears to be most significant among those involved in retail lending, including mortgage brokers and non-bank lenders, but the FCA did not give a breakdown of the 4,000 figure.

However, the regulator’s research asked about the impact in May and June with the fallout from the first lockdown at its most acute – since then the mortgage market in particular has boomed.

 

Retail lending markets hardest hit

The FCA found the greatest decrease in profitable firms between February and May/June was in the retail lending sector and more than half of firms added that their business model had been hit.

This includes credit reference agencies, debt purchasers, collectors and administrators, debt advice firms, motor finance providers and peer to peer lending platforms, along with mortgage advisers and non-bank lenders.

Of the 4,976 respondents from this sector, 1,495 or 30 per cent said they were unprofitable after the coronavirus started, down from 1,014 or 20 per cent who said they were unprofitable before it hit.

Average profits also fell sharply producing the steepest fall in cash terms of the whole industry.

The median profit for retail lending firms fell by almost half from £9,000 to £5,021 during the first wave of the pandemic.

Reflecting this, the most negative outlook was in retail lending where 2,891 respondents, or 58 per cent, said their business model had been damaged.

This was the highest in terms of proportion and actual numbers across all sectors of the industry.

And two thirds of retail lending firms were expecting a fall in income as a result of the pandemic – matched only by those involved in retail investments.

Illustrating the severity of this, 15 per cent of firms, a total of 421, said they expected their income to fall by more than half – by far the largest number in the industry.

Perhaps unsurprisingly, firms in the sector were also the most likely to take advantage of government support.

Half of retail lending firms had furloughed staff and 36 per cent had received a government backed loan at the time of response.

One note of encouragement, there was an increase in liquidity for the sector with the median firm reporting its liquidity at £73,466 – up from £47,000 pre-pandemic.

 

Low resilience and heightened risk

The results come from surveys sent to solo-regulated firms to inform the FCA of the impact of coronavirus on firms’ financial resilience, with approximately 19,000 responses received.

It did not cover the 1,500 largest firms, such as the main high street banks, in the financial sector which are regulated by the Bank of England’s Prudential Regulation Authority.

FCA executive director of consumers and competition Sheldon Mills, acknowledged the market was in an unprecedented and rapidly evolving situation.

“A market downturn driven by the pandemic risks significant numbers of firms failing,” he said.

“At the end of October we’ve identified there are 4,000 financial services firms with low financial resilience and at heightened risk of failure, though many will be able to bolster their resilience as and when economic conditions improve.

“These are predominantly small and medium sized firms and approximately 30 per cent have the potential to cause harm in failure.”

Mills noted that the regulator’s role was not to prevent firms failing but to ensure it happened in an orderly way.

“By getting early visibility of potential financial distress in firms we can intervene faster so that risks are managed and consumers are adequately protected,” he added.

 

 

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