Non-bank lenders can compete on ‘product innovation’ and ‘flexible criteria’, lenders say

Speaking on a panel at the Deal Catalyst’s Annual Investor’s Conference on UK Mortgage Finance, about whether non-bank lenders might need to pursue banking licences, Jason Neale, founder and managing director at Quantum Mortgages, said that the market would be a “really boring place if all specialist lenders had banking licences and acted like banks”.

“However, the reality is if your objective is to generate huge volumes of vanilla, low margin mortgages, absolutely you need to acquire a banking licence as non-bank lenders cannot compete with banks and deposit lenders when it comes to price,” he explained.

Neale continued that “banks can’t do everything” and that typically around complex borrower circumstances, and that’s where non-bank lenders could compete on more flexible criteria.

“The reality is that no one could originate high yielding mortgages the way non-banks can. That’s typically because we are closer to the market and we are closer to all the brokers that write this business and we are fleet of foot enough to adapt to the market very quickly”, he added.

Neale said that “going forward” non-banks would compete with banks on “product innovation and more flexible criteria”.

Nicola Richardson, chief financial officer at Fleet Mortgages, said that non-bank lenders securing a banking licence could “certainly be an option” though it may not be the “best option in all scenarios”.

She noted that securing a banking licence should be “done with a long-term strategic goal”, rather than solely having access to savings deposits as a source of funding, adding that there was a lot of regulation and investment alongside it.

“Just because you are a good lender doesn’t mean you will be a good banking lender, they are different disciplines,” Richardson said.

She continued that non-banks could still compete with banks by being “more innovative with client criteria and making it wider” and also looking at different sources of funding, such as forward flow arrangements.

Kensington Mortgages grows market share following acquisition

Alex Maddox, capital market and digital director at Kensington Mortgages, said that since the firm was acquired by Barclays earlier this year the firm has been able to grow its share in the specialist owner-occupied sector around 30 to 35 per cent to mid-40 per cent.

He noted that was partially due to not having to go to the securitisation market as often and having access to deposits.

“It is a tough environment and I think that for lenders to survive over the next couple of years it may be a good time to get the backing of a large financial institution,” Maddox added.

Select specialist lenders could struggle but opportunity for ‘strategic partnerships’

Neale noted that lenders that would thrive in the current environment would be banks as they could compete on price as well as specialists who underwrite more complex cases and take a more manual approach with underwriting.

“I fear for the specialist lenders in the middle, so these are the non-bank lenders who have a couple of me-too type products, so doing the same that banks do…and probably operating on a product fee model so their income is mainly from product fees. I think those lenders will find it difficult over the next couple of years,” he explained.

He noted that in the specialist buy-to-let space, there “absolutely does need to be some consolidation” noting that even prior to the rate rises over the last 18 months it was a “massively over-supplied market”.

“Now we are seeing transactions around 20 per cent down, so I think the reality is it is not sustainable to have this many lenders in a much smaller space,” Neale said.

Stuart Cheetham, chief executive of MQube, that the “only benefit” of being a banking lender was retail change and banks “simply aren’t set up to deliver that level of change in speed and innovation”.

He noted that there could be an opportunity for specialist lenders to make “strategic partnerships” with mid-tier banks or building societies as they were “struggling to deploy capital liquidity in a depressed marketplace”.

“These are really areas of businesses where they need to be trading consistently through this process and they are hampered to do that for all the reasons around innovation, legacy systems and so on. The specialist market can work really efficiently with those able to deploy capital through foreign buyers or technology deals or whatever that is,” he explained.

Cheetham noted that in the specialist lending market in the next 12 to 18 months there would be “more innovation and more unique products coming through”.

He pointed to lending into retirement, stress rates, different kinds of affordability assessments and rental assessments as areas that could experience more innovation.

“What you’ll find in specialist space is that products will be produced that will allow people to still trade in mortgage, still buy their houses and remortgage and this will generate opportunity in specialist space,” Cheetham concluded.