A move into a bigger market

WORDS BY BRADLEY GERRARD

Burgeoning firms often expand into underserved markets, but Welsh bridging lender Cornerstone Capital appears to be going against the grain

Back in February, Cornerstone Capital—the privately funded company which is part of Cornerstone Finance Group—announced it will expand out of Wales and into the competitive English bridging loan market to cover both areas. Its conventional bridging loan products proved popular in its home market, leading to the firm’s decision to roll it out in England. Chief executive Haydn Thomas says the size of the English market made it compelling to target, but there were other factors too. “The main driver was to have an offer that was accessible to the majority of the Cornerstone Network’s appointed representatives,” he says. “It’s fair to say that minimum loan sizes are rising too and, with ours starting at £25,000, we have an attractive offering.”

Not only that, Haydn believes its level of service helps the firm stand out. “We’re very much relationship and repeat business orientated,” he states. “We are focused on the quality of the client; we offer flexibility, good-quality pricing and we’re transparent. When you look at our quotes overall across the board, we are competitive with very big players, and I believe we operate in a far more speedy manner.”

For example, Cornerstone Capital has previously arranged a loan in the space of a week, which Haydn cites as evidence that the firm can move fast for clients when required.

The business has lent £10m so far, with the vast majority of this linked to Welsh projects. While some of the loans were for projects in Cornwall before the expansion into England, Haydn clarifies that these excursions did not directly lead to the move.

“These were attractive deals that we secured via an individual we already knew,” shares Haydn. “They were an exception at the time, but we knew the individuals, liked the property, and we’ve got a pretty good knowledge of Cornwall as two directors have spent a lot of time there.”

The lender is now firmly focused on England and Wales only “for the foreseeable future”, says Haydn, as venturing into Scotland would require a legal firm to draw up fresh documentation.

So far, Cornerstone Capital has had half of what it has lent out paid back by its clients, and expects to bolster its loan book as it establishes its footprint in England. While it hasn’t published its internal targets, Haydn states that a loan book size of £10m in 2023 would be a “minimum goal”.

According to Haydn, one advantage the firm has over some of its rivals is the broad links of its parent company. “Cornerstone Capital is a complementary service alongside Cornerstone Commercial Finance and within the wider Cornerstone Finance Group,” he explains.

“The Cornerstone Network now has 100 advisers, which means we have an army of field sales representatives in the regulated space across England, as well as some in Scotland, and they can offer their clients access to [Cornerstone Capital’s] non-regulated bridging loan product,” he elaborates, adding that this is a USP for the firm’s network.

As Cornerstone Capital’s clients are excluded from marketing or contact from other parts of the wider Cornerstone group, this means the existence of the network “is generally not a barrier” for other brokers considering its bridging products. The offering, which can be extended to 75% LTV, is also available through some third-party intermediaries, helping to ensure the product is more widely available.

Haydn points out that the finance provider is also seeking to develop relationships with accountants and estate agents, which could further widen its reach. It already has connections with accountancy firms and solicitors in and around Cardiff, including Kilsby Williams, Haines Watts, and Sivapalan & Co, with the aim of establishing more partnerships “across a much wider geographical area”.

The intended clients of the product include sole traders, partnerships and limited companies, and the loans— which can range between £25,000 and £500,000—are focused on residential and commercial property. The firm does not offer loans for land that has no building on it.

Haydn estimates that roughly 60% of its bridging loans are used to remortgage properties, freeing up cash for clients to either purchase more or improve their existing ones. Deals have included loans to fund auction purchases and equity release from commercial properties to fund residential ones. Uncertainty and rising rates in the BTL and commercial markets since November last year have led to an increase in bridging as a short-term solution while the market settles, he believes. “Many entrepreneurs are also releasing equity to take advantage of off-market sales at a discount, and bridging offers a great solution for them,” he adds.

The lender’s rates start from 0.55% per month, with an arrangement fee of up to 2%, and a broker fee of up to 2% (but usually closer to 1%).

Cornerstone Capital uses Method Valuation, a panel management service that Haydn says has helped ensure clients receive quick decisions. “We very much look at the individual and the asset liabilities, along with the exit,” he explains.

The terms of the firm’s bridging loans range from three to 12 months, with extensions available on a case-by-case basis. “We don’t charge over-exorbitant fees for short extensions,” Haydn comments. “I think we’ve done two where it was extended by a month due to a delay in the sale or delayed refinance elsewhere, and we charged a month’s interest.” An extension of three months would incur interest plus a fee.

Looking ahead, Cornerstone Capital is aiming to develop organic growth in England by building its reputation and client base through its existing customers and its parent company’s adviser network.

The firm has a five-year plan to become more of a standalone brand, which Haydn says means less reliance on Cornerstone Financial Group’s wider business for support and introductions.

While the lender has no specific lending targets for the coming year, Haydn says the company’s funder is interested in growing the company and has “substantial resources to do that”.

The support from its funder has enabled Cornerstone Capital to remain competitive, with Haydn stating that the firm only raised the interest rate it charges by a marginal 10 basis points in November last year, despite several interest rate rises by the Bank of England since.

With the pace of property price growth dampening alongside increasingly prevalent affordability issues, there could be significant opportunities for investors that can secure the capital—and, crucially, for those that can supply this.

When you think of money laundering in the property market, the first thing that naturally comes to mind is properties purchased with cash. It is without question one of the sector’s biggest money laundering threats, and all too easy without the necessary checks in place. Almost £7bn of suspect funds from around the world have been invested in UK property since 2016, according to research published last year by Transparency International.

What is not so instantly apparent is the use of mortgaged property or loans as vehicles to launder money. But, as criminals explore ways to filter illicit funds under increasing spotlight, lending of all kinds presents a potential rat run.

Much like solicitors and estate agents, lenders are legally required to complete anti-money laundering (AML) checks. However, with cash purchases more prevalent and presenting much of the risk, there’s a possibility that finance providers could become complacent or slow to modernise their AML processes and responsibilities in line with growing risk. Perhaps the most obvious approach is for criminals to use dirty money as a mortgage deposit, although this should be weeded out at onboarding by both lenders and solicitors through robust Know Your Customer (KYC) checks. However, with an overreliance on flawed physical documents and manual checks within legal and financial services, this isn’t always guaranteed. Our most recent survey of regulated legal, finance, property and banking firms found that nearly half still use hard documents—such as passports, ID cards and utility bills—in some way to verify new business customers. Beyond deposits, criminals could also use laundered cash to overpay a mortgage or loan, or use a relative or close contact to act as a third party who could use their bank account or transact on a criminal’s behalf. That’s not forgetting commercial lending, such as securing a BTL mortgage and laundering cash through rental income.

Rather than give would-be criminals a helpful cheat sheet, my aim is to encourage all parties to be alive to the serious threat of money laundering. After all, those who lack suitable processes face far more than just a slap on the wrist. In addition to being named and shamed by the FCA for non-compliance, there are hefty fines and lengthy investigations that can debilitate organisations. Even as recently as the past year, we’ve seen examples of lenders and financial institutions facing regulatory action for non-compliance. Among these cases, the FCA has identified serious shortcomings and major breaches of regulations through lacking basic customer due diligence, money laundering checks or ongoing monitoring.

Firms have also been found to be under-resourced, which has led to staff not screening people appropriately, as well as working with customers who are politically exposed persons (PEPs). This is a clear reminder of just how necessary robust checks are—and also of the determination of regulators to tackle non-compliance.

Recent judgments by the FCA have also highlighted flaws in identifying and monitoring business customers, leading the regulator to hand out multi-million-pound penalties to some of the largest banks in Europe.

As part of our survey at SmartSearch, more than one in four finance and banking firms admitted to similar compliance weaknesses. Some 26% said they either did not complete any verification checks on new business clients or did so just “some of the time”.

More worryingly, almost half (45%) disclosed they did not identify the ultimate beneficial owners (UBOs) of the new companies they dealt with. This loophole is a key mechanism