The most recent in an ongoing series of industry panel events led by United Trust Bank (UTB) brought together professionals from across the second charge market, who agreed that more must be done to shore up and promote this important product class.
The event, chaired by Caroline Mirakian, UTB’s sales and marketing director, and held on 19th March at its offices in Central London, found that despite reporting a strong performance for 2024 so far – including record application numbers in February for some – the second charge market was not as busy as expected in 2023.
The market remained “stuck” at around £1.4bn according to Buster Tolfree, director of mortgages at UTB, despite much more optimistic predictions.
Ben Gillespie, director at Chaseblue Loans, suggested that this was partly to do with wage inflation, which staved off some consumers’ need for debt consolidation.
Meanwhile, whereas debt consolidation reflects an immediate need, those who might value second charges to help with other elements – such as home improvements – likely held off last year to wait out a volatile financial environment.
Barney Drake, CEO of Specialist Mortgage Group, said: “I’m glad 2023 is behind us. So far, we’re doing well in 2024 – this year has got off to a good start.
“We’re getting consistency now, and long may it continue.”
Record numbers of applications are a good thing, but Phil Bailey, partnership director at Loan.co.uk, voiced concerns about the shortage of advisers, and the difficulties around hiring for vacancies.
Having the conversation
David Coleman, head of sales at Positive Lending, noted that last year did see more intermediaries coming into seconds due to wider difficulties in the market spurring them on to diversify.
However, considering the economic factors affecting borrowers, the panel agreed that 2023 was expected to be busier overall for this market.
Coleman added that this was perhaps a sign that more brokers must make efforts to ask the right questions when a client is looking to a product transfer, in particular.
“I would have expected 2023 to be busier, especially because one of the main uses of seconds is debt consolidation,” he continued.
“We’re seeing even the more affluent clients come across the table for debt consolidation – it doesn’t matter what walk of life you’re in, people are now considering second charges.
“However, that’s driven by the intermediary, and if they’re not discussing it, the client isn’t aware – no one’s going to phone up asking for a second charge.”
The panel added that, with affordability models proving better in the second charge world, there was no reason not to see more business driven into this side of the market considering the current economic conditions.
Part of pitching this type of product successfully for brokers, Bailey said, is about focusing on savings, rather than rates.
Coleman added: “That’s where the value of a good broker comes in.”
There was also discussion of how brokers can handle conversations around relatively high fees in this market.
On this, Drake said: “It’s all down to the fair value assessment – could lenders increase the interest rate to pay us more money so we can reduce the fee?
“Whether rate or fee, the customer pays, and they’ll pay more long-term by having a higher rate for the term.”
Either way, Tolfree added, fees in this market are representative – largely of the cost of acquisition – allowing firms to make a fair profit, rather than representing unfair pricing in need of curtailing.
A matter of branding
A concern that arose during the discussion was that the term ‘second charge’ has negative connotations, often being put in the same category – with the same stigma – as payday loans.
However, while it was agreed that the market needs a “change of branding,” the panel did not reach a consensus about what this shift in messaging might look like.
Richard Sharp, managing director at Aro Money, said: “Some of the bigger brands, just don’t seem to like secured loans because of practices from 20 years ago that don’t exist today.
“We’ve done a lot of work to prove that actually this product is a very good one for a segment of their community.
“We’re getting through to them now, but it comes back to the fact that the biggest challenge right now is questions around the product from years gone by.”
Sharp added that to address these issues, and what words might trigger a more positive reaction, the market should consider “what consumers actually want and what they react to.”
Even more so, he urged people to focus on what the loan is trying to achieve, and to remember that money management apps, for example, are highly popular – the messaging around seconds should, therefore, align with this customer need.
Bailey added that this was reflected in how customers searched for products; rather than looking for a ‘homeowner loan’, they are likely to search for solutions based on need, such as debt consolidation.
One of the issues, he added, was that placing seconds under the ‘specialist’ umbrella might be misleading, as this is simply “a loan with extra checks.”
A further problem raised by the panel was the need for brands in the wider market to ensure they have second charges represented on their panels, which was felt could double the business done in this market “overnight.”
In fact, at the moment, Paul Zammit, director at The Loans Engine noted that a fair number of networks restrict advising on second charges, which needs to change.
One of the reasons cited for a lack of awareness and proactiveness when it came to second charges was also the event circuit, which panellists agreed had little space for second charge speakers or champions.
This is because, as Zammit put it: “Some networks don’t see the value in promoting seconds, because they want their brokers to focus on the day-to-day remortgage.”
Meanwhile, Drake said, while many brokers simply “don’t understand” the product, they are also seeing “regulatory pressures at their height,” giving them even less impetus to branch out into this area.
The consensus was that this market could do with a “brand champion,” or at the very least, a stronger push from bodies such as the Association of Mortgage Intermediaries (AMI) and UK Finance to represent the product and shout about its value.
To do this, however, Tolfree pointed out that it comes back to the standardisation of terms, and a strong sense of branding for the product.
Bailey added: “The customer has no initial idea of the sector; there needs to be a standardised set of terms used.”
Sharp agreed, adding: “That’s not just a customer-facing thing, either. There’s so many ‘internalisms’ that are used externally that don’t need to be.”
Consumer Duty
Drake pointed out that one of the headwinds affecting this market was scrutiny from the Financial Conduct Authority (FCA), which is potentially “not happy at the moment with the way some firms are charging fees, or have been preparing for Consumer Duty.”
While some firms have maintained the same fee structure but simply looked at how to justify it under Consumer Duty, Drake suggested that the regulator instead wanted to see evidence of a total review and overhaul.
The panel agreed that the FCA, ultimately, wants the market to continue to function and be profitable, but Coleman noted that one of the sticking points may be the varied market at play.
For example, depending on overheads, outlay, lead generation methods, and more, costs might vary significantly from one firm to another, making it harder to police fees.
Sharp described the FCA’s current efforts as an information gathering exercise, allowing it to get an in-depth look at the market before making any judgement – the outcome, though, will be hard to predict.
“One thing that is certain is that it wouldn’t make sense to curtail a market that is functioning well and giving good customer outcomes,” he said.
“However, [the regulator] has to do something, otherwise what’s the point?”
Drake reiterated that the FCA is, ultimately, “an organisation that wants to work with you,” and suggested that the best-case scenario would be a similar outcome as that seen in the equity release sector: a series of recommendations to shore up weaker activities where they exist in the market.
For example, Sharp suggested interest-free fees might be one recommendation.
However, one worst-case scenario might be if the FCA does not see enough documented evidence of suitable advice, which would result in a much harsher outcome.
Big names on campus
Other headwinds affecting the current state of the second charge market mentioned by panellists included a shift in consumer demographics, with higher earners looking for debt consolidation solutions, which has been pushing the average size of loans up.
In addition to this, the panel pointed to the news that this year would see some new, large lenders entering the market – most notably Admiral.
The emergence of a household name into this space could help inject more trust and legitimacy into a market still plagued by misconceptions and lack of awareness, said Zammit.
He referred a new lender arriving in 2024 as a potential increase of the “top end of the funnel” that could then channel more business into this market, which Sam Busfield, owner of Loans Warehouse, agreed could “add gravitas.”
However, Zammit added: “That’s great, but they must make sure that their offering enables us to help more customers.
“If you’re going to come in and undercut rates and undercut relationships that we’ve built, and not to add value, does that help?
“I really hope that they’re coming in with some new innovation – whether it’s product, criteria, or systems.”
However, it was clear that there is no one silver bullet that will revolutionise this market.
For example, being able to turn around a loan at high speed might sound ideal, but would likely have an effect on security and risk.
In fact, Sharp added, most clients do not mind – within reason – the current turnaround times, instead focusing on the benefits and savings to be had from the product itself.
Therefore, the push in this market should be towards removing barriers, rather than reducing the time.
For example, Tolfree suggested it should be more about solving sourcing than bringing in new brands to the market.
Secure technology
When it came to removing some of the sticking points and barriers within the second charge market, the panel agreed that technology and data sharing was on the right path, but must still see improvement to get to the right level.
For example, panellists called for HM Land Registry to implement an application programming interface (API) facility that is fit for purpose.
Meanwhile, Bailey said his business invests so much in tech as part of its model that it is “more of a fintech,” and yet is still working toward the level of efficiency savings that would allow it to lower fees significantly, due to inefficiencies elsewhere in the wider market process.
This includes a lack of sufficient data sharing in the market, with lenders having to go through many of the same processes that have already been done upfront.
When asked whether this was a job for artificial intelligence (AI), Busfield said: “I don’t think it’s there yet.
“It depends on where you want to go with AI – at the moment it’s viewed just as efficiency and saving time, rather than intelligently using the data and reading it.”
However, Tolfree noted that there is still a lot of “convincing to do” around tech in this market, with efforts to implement Open Banking, for example, having met barriers – let alone the much more advanced topic of AI.
Nevertheless, Drake said: “AI has the potential to do something extraordinary, certainly from an advice provision and data gathering point of view.
“For us, that’s a lot of work and you’ve got to get it right, so if AI is able to support that I can’t see why it wouldn’t help us as an industry – and that’s a scalable level of assistance it can provide.”
Bailey agreed that AI – already used in his business – has a greater role to play as the market moves forward.
He added that this market would benefit from improvements in tech at the front end – such as aggregators – being used to drive customers to understand the variety of options available to them, including seconds.
Sharp also felt that tech and AI could have a major role to play in this market, but warned of a need for “short steps” in this process.
Bailey added that AI also has an application, already in place for several businesses round the table, when it comes to analysing calls – down to tracking hesitations to root out vulnerabilities.
Ultimately, though, even with all these advancements, the panel agreed that software provision in seconds could be improved, , and when it came to sourcing was certainly not in comparison with firsts.
Issues were raised around the need for greater access via sourcing systems in particular; meanwhile, for those that do their own sourcing, this was described as a “mammoth task.”
The future
Looking at driving seconds forward – both in terms of consumer awareness and broker proactivity – Sharp and Bailey suggested that once the FCA delivers its report, that would be the moment to “make noise” around this market.
Whether the report itself is positive or negative, the media coverage it is likely to instigate, if used correctly, could be a much-needed “megaphone for the market.”
Furthermore, Busfield called for genuine discussion of second charges at expos and other industry events, as well as a presence of people with real experience in this market on stands and at the coalface – ultimately, “lenders must fly the flag.”
To carry this momentum forward, however, Coleman added that brokers must be open to these products as the potential source of the best customer outcome, while Gillespie said that on the other side of this, there should also be repercussions – as there are for other products – for not mentioning seconds to clients who might benefit.
Coleman concluded: “If all those brokers looking at unsecured loans, product transfers or remortgages just considered us, there will be instances where [seconds] will be the standout winner.”
Read coverage of the previous UTB panel event here.
