The UK economy is emerging from the financial instability that has characterised the past few years. The mortgage market is moving back to growth, with the Council of Mortgage Lenders predicting that volumes will rise further during 2014, potentially reaching £200billion. This market movement is not just an opportunity for existing established lenders, but also for new entrants.
The mainstream market has been arguably over cautious with its lending since the financial crisis, viewing many borrowers as too ‘high risk’. For the industry to remain healthy and continue to grow, new players need to be successful in order to increase competition with the big banks and ultimately improve the customer experience. New entrants therefore need to find new distribution strategies to build market share.
Advantages for new entrants
What new entrants all have in common is a belief that the crisis in the UK’s financial services industry resulted in a lack of public confidence in the main-stream mortgage providers, and an underservicing of a core group of potential customers. This in turn has created an opportunity for new players to win over customer trust and therefore business. New entrants can position themselves as an alternative to the traditional lenders, who since the 2008 crash have struggled with consumer perceptions. One key differentiator that new entrants have been promoting is their ability and willingness to take on more risk in their lending, whilst still adhering to the FCA’s compliance regulations.
With the mortgage market recovery finally taking root, and consumer confidence returning, demand for mortgages is once again increasing. This presents a perfect opportunity for new entrants who can get their offering right. The recent Mortgage Market Review (MMR) also brings extra stability to the industry, however, implementing the right processes to be MMR compliant in a cost and time effective way can prove to be a challenge for established and new entrants alike.
Something old, new or borrowed?
It is important for institutions wanting to provide capital to the UK loan markets to be clear on their entry options. The most obvious options are to provide funding to an existing lender or create a new one. A third option is to plug into an existing operational capability where the funder has more control over the proposition and much less of the operational and regulatory infrastructure than a start-up. These are all possibilities and each one has its advantages and disadvantages.
If for example, a funding provider invests with an existing lender, they would have to adapt to all of the current norms of that lender in terms of product and proposition. This option inevitably provides less control, as they are merely introducing funding to an existing lender rather than designing and delivering something unique. However, the advantage to this route is that the process of getting to market would be relatively quick as the funder would not have to apply for FCA licences.
When it comes to setting up a new lender, whilst ultimate control will remain ‘in-house’, there are significant costs and barriers to entry to bear in mind. FCA approval can take up to 12 months, and is a rigorous and admin heavy process. There are also the additional costs that need to be considered, including office space, employing experienced staff before lending, fit for purpose technology, legal and regulatory documentation and processes, and the general building of a sizable infrastructure.
Outsourcing the infrastructure build to a third party specialising in operations and lending infrastructure is a viable alternative which helps overcome speed and cost to market hurdles. It allows funders to grab an opportunity when the market is ready, ensuring that their product is still relevant when they actually come to launch it. These firms are given immediate access to lending licences and there is also a managed and transparent regulatory risk infrastructure and cost base. This provides the funder with time to focus on their core activities around product, policies, and distribution while maintaining control of their operations through an oversight role. However, it is crucial that the funder chooses the right partner from the beginning.
Outsourcing supports good lending
Lenders of all shapes and sizes can outsource to a third party who are experienced in dealing with these challenges. They can then get to market quickly, whilst their proposition is still relevant. In such a fast paced market, time really can be a risk factor, with offerings potentially seeming out of date in a matter of months. Only when policies and processes are streamlined can lenders focus on the core products they are looking to promote. Unburdening them of the operational and back office functions allows them to focus on the funding and product distribution. Then outsourced support can be deployed when required.
It is an extremely exciting time for the UK mortgage market, and one that presents as many opportunities as it does challenges. For those willing to adopt the appropriate processes and systems, there is no reason why 2014 can’t be a successful year for them. We hope that these new entrants can further shake up the natural order of things and restore some real competition to the market. All in all, the more choice and variety there is in terms of products, and pricing, the more the customer stands to benefit.