Advice review

The benefits of diversification

Gordon Reid

business and development manager, The London Institute of Banking & Finance

For many years, it’s been possible for mortgage advisers to make a healthy living by focusing on their core business. Looking after customers in a particular sector of the market has often been sufficient to help maintain and grow a healthy company.

Of course, successful advisers have also needed to be accomplished in their specialist areas. Having initiative and drive, great communication skills, and clear objectives are essential attributes to help you achieve your goals.

Adaptability has also been a key indicator of success. Now, however, this could be the differentiating factor between those who survive and those who thrive. Focusing on meeting a fairly narrow set of needs carries a risk. And you can no longer afford to put all your eggs in one basket.

WHAT IS DIVERSIFICATION?

Diversification is a strategy to enter a new market in which your business doesn’t currently operate. As a mortgage adviser, the great advantage you have is that diversification doesn’t require you to develop a whole new set of skills. Instead, the key is to adapt your existing skills and apply them to a different sector of the financial services market.

There are many other products and services which, as a mortgage adviser, you may choose to offer. Some of these, however, are a more natural fit than others, and involve less retraining.

For example, the later-life sector is thriving, especially with the costof-living crisis squeezing retirement income while property values remain high. The skills you’d use to be an effective adviser in this sector are the [B]y operating in different sectors, you’ll boost awareness of your brand, which could even mean you retain a higher share of your core market, as well as attracting new business

same as the ones you use in your dayto-day role. You’ll need an additional qualification, but you can study for it and qualify in about six months.

Similarly, if you’re not currently offering your customers advice across the full range of protection products, you can easily develop your knowledge to do so. This has the obvious advantage of enabling you to help customers who don’t currently have any need to borrow but might, for example, be looking to protect their income as we enter a recession.

If you’re prepared to spend more time on developing your knowledge, you could consider studying for a qualification in financial advice. That would enable you to provide holistic financial planning and advice across a whole range of your customer’s needs.

Then again, if you prefer to focus on the lending side of your business, what about moving into areas of specialist property finance? Demand for bridging loans, buy-to-let mortgages, commercial finance, and development finance remains strong. Now is a good time to develop your knowledge in these areas. You may also want to start building relationships with specialist lenders and join a relevant trade body or network that specialises in supporting advisers in these types of lending.

WHAT ARE THE BENEFITS AND RISKS OF DIVERSIFICATION?

The key benefit of being able to advise in different areas of the market is increased adaptability. You’ll be able to bend and flex according to where there’s demand and, conversely, you’re less likely to take a hit if demand for your current skills and services falls.

You will be able to attract a broader range of customers and service a wider range of their needs. By securing your income in this way, you’ll be in a better position to plan future developments for your business. Finally, by operating in different sectors, you’ll boost awareness of your brand, which could even mean you retain a higher share of your core market, as well as attracting new business.

However, diversification will likely increase the number of processes you have to follow and policies to comply with. That can increase the risk of making mistakes.

To reduce this risk, you will almost certainly need to undertake more CPD, even if it is not a regulatory requirement. You may even need to invest in additional hardware and software or employ additional staff.

HOW TO DIVERSIFY

The first thing you must do is to complete your research. Make sure you understand the sector of the market you are considering entering. Conferences, webinars, and the trade press can all help here. Our own mortgage conference in November, for example, will bring together experts in mortgages, later-life lending, and protection, with a strong focus on adviser development to discuss the future of the sector and the market.

Think about your customers and where you may be best able to serve their additional needs. For example, do you have quite a mature client base, who might benefit from later-life financial planning advice? Or do you tend to have younger customers whose protection needs may be paramount? This approach will give you a strong indication of how you can diversify to complement your current offering. M I

Pivot, pivot, PIVAAT!

Matt Smith

MD, WPB

No sooner was the queen buried in September than the nation’s hopes of a stable financial future met an equally unhappy end in Kwasi’s mini budget. Even the Bank of England had the good grace to not pile on the misery while Her Majesty lay in state. But cometh the hour, cometh the man with a plan few appeared to think was a good idea.

In a revised version of Dante’s inferno, there might be another circle of hell for chancellors who have clearly misread the mood of the nation (and the nature of gilt markets), which, it turns out, doesn’t care so much about economic growth. People just want to see their debts paid.

As a result of the debacle, we have already had a U-turn on the notorious top rate of tax cut – and a new chancellor – but the markets are not truly placated and neither is the party. By the time this makes press, we may have had news from the OBR on how the great giveaway will be paid for, but currently, two-year swap rates stand north of five per cent. This is an almighty payment shock for those coming off fixed rates from a couple of years ago. People genuinely do not understand mortgages at the best of times – how they are funded, how compound interest works, etc. They simply see monthly payments go up or, in the worst case, become unaffordable.

With the FCA’s consumer duty of care rules in full force from July 2023, who would want to be a broker now – advising on paying back ERCs on current products to take higher fixed rates that may deliver some decidedly poor outcomes over the next couple of years? Lenders, for their part, will be watching knowing that if this does go sour, history tells us that those with the deepest pockets invariably get told to foot the bill.

Some lenders have run for the hills; others are simply waiting and seeing; still others are staying the course. But my guess is that most will be gearing up their arrears departments (probably with the same people who helped with the completions bubble some months ago). Retail savings rates are not reflecting the rises yet, but in January 2023 lender repayments for COVID loans are due, which might sharpen pencils and focus minds on improved savings rates.

Of course, not all lenders will be suffering – that will depend on the type of lending they have been doing – but calls into lenders requesting moves in payment dates or moving from one monthly payment to two are increasing and, elsewhere, reports of growing numbers of forbearance calls are being reported. One lender confided they had gone from 12 per week to 18 in one day – and we should bear in mind these are people who have had payment difficulties before, so they know what process and support are available to them. There will be many more distressed borrowers in denial who haven’t actually picked up the phone yet.

Change is truly in the air. In other markets in which I work, the results of Trussonomics have been equally unwelcome (unless you are shorting the pound). For insurers and reinsurers, the inflation problem underpins the concern that the cost of putting things right is increasing exponentially. You can see why. Wildfires, flooding, storms, etc. all demand repairs and preventative infrastructure that sucks up resources that are in short supply. Inflation in this respect is structural – not just a global supply-chain/Ukraine issue.

I happen to think inflation is anything but temporary, so higher interest rates are not going to dissipate any time soon. We are well and truly moving through the credit cycle. Thousands of people who fixed only eighteen months ago will get a shock in a couple of years, and lenders will be focused on managing risks as much as market share.

The saving grace is that we have full employment, so to speak. As long as that remains the case, we might yet dodge some of these bullets. But the focus has changed – it’s not about how much you write but whether you have the right lending on your books to weather a storm.

As for our PM, well, giving Labour a poll lead of the size they currently enjoy, sidelining the OBR, and insisting “We are not for turning” don’t say anything good about the tone-deaf nature of our leadership. Nor can I honestly believe MPs in marginal seats (the MPs didn’t want Truss; the membership did) will compliantly follow her for the next two years. Expect more U-turns everywhere. As Ross Geller so wisely reminds us, it is the age of the Pivaat! M I

Understanding equity release means understanding borrowers’ motives – and the likely risks

Steve Goodall

MD, e.surv

More than 200 homeowners per day over the age of 50 drew cash from their homes using equity release between April and June this year, according to the Equity Release Council. Although Q3’s figures are still to be published, it’s likely that this number will have increased.

Inflation close to 10 per cent is taking its toll on almost all households, with those in lower income brackets facing awful choices on where to spend what little money they have and what they must forgo.

For pensioners, the cost of living during ordinary economic times tends to be lower than average.

Not so when inflation runs riot. A recent briefing note from the Pensions Policy Institute states that in 2022–2023, very few pensioner income sources will increase in line with the cost of living, except for public-sector pensions or RPI-linked defined benefit pensions.

Both the basic state pension and new state pension increase with at least earnings inflation, consumer price inflation, or 2.5 per cent, whichever is the highest. But last year artificially high wage inflation caused by the furlough scheme the year before prompted government to cancel the triple lock.

Although state pensioners have been promised an inflation-linked rise for 2023–2024, that higher income won’t actually come through until April next year.

With the bulk of inflation coming from rising energy bills, even with the price guarantee and emergency support payments factored in, older people have been hit hard.

Those who have retired are likely to need the heating on higher than most of us, and for longer during the day. The price of food is also going up – still – and the Bank of England has shown it has no plans to ease monetary policy to appease families facing financial crisis. Mortgage payments, credit interest, and rents are all on the up as well.

Those over the age of 65 are likely to have seen their financial positions hit harder than those in younger age brackets, and it is changing their behaviour.

The Office for National Statistics’ latest Over 50s Lifestyle Study shows that in August this year 72 per cent more 50- to 59-year-olds were thinking about going back to work than had been in February.

Two out of three of those people said their motivation was money.

But not all retired people are able to go back to work for an income boost. As pensioners age, their health needs change, disabilities become more prevalent, and mobility is impaired over time.

Data from the Pensions Policy Institute shows, in fact, 57 per cent of retired households have a member with a disability, compared to 32 per cent of non-retired households.

As pensioners age and spend more time at home, the proportion of income spent on food, health, housing, and energy increases. So does wear and tear on their home, necessitating more frequent maintenance, and sometimes alterations to the property to accommodate the less mobile.

It’s therefore unsurprising that we’re seeing more and more people turn to equity release – whether it’s to pay off the mortgage before rates go up further or to help cover the cost of living. Those in retirement today are more likely to own their own homes and have significant equity in them.

Data compiled by Canada Life using Halifax house-price index figures suggests there was a record £811bn available to release from homes owned by those over the age of 55 across England, Scotland, and Wales in Q2.

That is an extraordinary sum, and lenders view lifetime mortgages as a loan with virtually no affordability risk. Given the cost of energy, heightened uncertainty in international geopolitics, and a new government whose first budget sent markets into a tailspin in the days that followed, low affordability risk looks a lot more attractive than it has for a while.

This perspective has merits, but it should not be the only one considered carefully. When it comes to equity release, the security risk is often higher than on term mortgages.

As I’ve already said, the increased wear and tear and maintenance that come with people being at home more of the time can be considerable. Home alterations necessary for the lifetime mortgage borrower can affect resale values. As people age, they also become more vulnerable.

The rewards for lenders offering lifetime mortgages are clear, and so should the risks be – because they matter when it comes to assessing value. Boots on the ground are often the only way lenders can really know anything about these properties – which may not have been mortgaged for some time. M I

Arrange the following words: “Frying pan, fire, jump …”

Tim Hague

MD, Sagis

I’m loath to set the scene for this month’s column, so rapidly are things changing. As I write, lenders have pulled more products in the past 24 hours than has ever happened before. Unless we’re in for even more radical change, the Financial Conduct Authority (FCA) is expecting regulated firms to be ready to implement its new consumer duty rules by 31 July next year.

Even if lenders weren’t facing a commercial assault born of the toxic cocktail of sharply rising interest rates, swap rates spiking overnight, inflation close to 10 per cent and tax cuts that fail to support those most in need, this would be an ask. Adapting systems and processes to accommodate regulatory change is always time-consuming, onerous, and expensive. Of course, lenders have no choice but to get on with it, but working out how to deliver services and products that are compliant with the consumer duty is considerably tougher than other regulatory change has been.

If you are expected to adhere to the consumer duty, you need to know what it is. The FCA has issued guidance for lenders on this point. This states: “The consumer duty is underpinned by the concept of reasonableness. This is an objective test and means that the rules and guidance must be interpreted in line with the standard that could reasonably be expected of a prudent firm.” The FCA’s expectations of firms under the duty rules are many. Among them, firms should:  put consumers at the heart of their business and focus on delivering

good outcomes for customers  provide products and services that are designed to meet customers’ needs, that they know provide fair value, that help customers achieve their financial objectives and which do not cause them harm

It sounds sensible – and yet, where regulation is concerned, the spirit of the rules must be underpinned by evidence of the firm following them. How do you measure good outcomes that haven’t happened yet? What harm are we talking about here? To what extent can a lender reasonably be expected to protect their customers from harm?

It’s ironic that I’m penning this today, of all days. Moneyfacts recorded a 935-product drop in residential mortgage products on the market, more than double the previous record daily fall of 462 on 1 April 2020 at the start of the COVID-19 lockdown.

This morning, there were 2,661 residential mortgage deals available, but lenders are still pulling them. Yesterday, that figure was 3,596, and last Friday, it was 3,961.

Kwarteng’s budget policy announcements have crashed markets, crashed the pound, and sent market interest rates up several per cent in less than 72 hours. Who would have predicted this just three months ago?

Let’s imagine ourselves in this situation once the consumer duty does apply. How on earth can lenders act responsibly from a prudential perspective and responsibly under the consumer duty rules at the same time?

How do lenders measure such things? Harm is caused to those whose fixedrate mortgage ends in the coming months, especially in the middle of a cost-of-living crisis. Several reports in the media suggest five-year fixed rate mortgages will be 6 per cent within weeks – the best buy at 80 per cent is already up to 3.84 per cent. Borrowers needing to remortgage from a two-year deal will see their payments rise by hundreds of pounds a month.

Is it more harmful to let them lapse onto standard variable rate without a reassessment of affordability or to attempt to remortgage, only to find they fail on affordability and cannot remortgage? There are provisions, of course, to do a like-for-like without the need for affordability checks, but when affordability for a five-year deal was initially stressed on the product rate which is lower than the product rate to which they are now switching, it will be interesting to see how lenders comply with the sentiment of consumer duty.

With energy bills now hundreds of pounds a month and food inflation over 10 per cent, never mind the cost of everything else, hundreds of thousands of homeowners may well now fall into arrears. Rumours are that arrears divisions are already gearing up and bodies being moved in to cope. For many customers it is inevitable, and it’s still going to be a massive problem come 31 July. This is a very real nightmare for lenders. Do they repossess? When? Negative equity now looks like a real risk again. Is it worse to take the roof from over their heads before they cannot afford to repay the mortgage and are left homeless and in tens of thousands of pounds of debt?

These are very difficult questions to answer from a moral standpoint. What is reasonable in the extraordinary circumstances we find ourselves in today?

Even more difficult is how lenders can answer the practical questions of quantifying harm, reason, and good outcomes.

No one has the answers. But I suspect it is brokers who are best placed to work them out. This mess is going to have to be sorted out one case at a time. Lenders who engage early with brokers to understand the nitty gritty clients are facing stand, possibly, a fighting chance of navigating what’s to come. M I