Responsible lending: The broker balancing act
The general public can be incredibly suspicious, especially when it comes to the sales environment in financial services.
Many clients of both secured and unsecured loan brokers will happily listen to their guidance, only to view with scepticism the products the broker eventually recommends. In most cases this is because the client, rightly or otherwise, perceives a conflict of interest. Knowing that the broker must be commercialising from the deal (often in a way that isn’t visible to them), they question whether their advisor is acting in their best interests. ‘Aren’t they just steering me toward a product that gives them the biggest margins?’
There is an awkward truth to this. Brokers, just like all businesses, are driven by the profit motive. How they stand to prosper the most is sometimes debatable. Few would argue with the notion that commercially impartial advice generates trust and leads to repeat business, but in the loans market in particular, how often is that piece of business likely to be repeated? Cold commercialism could, in theory, drive brokers to recommend only the loans that offer the highest returns, leaving less profitable products undisclosed despite being a better fit for the client’s circumstances.
Transparency is the watch-word here. If a broker is transparent about how it matches clients to loans, then the most common doubts that a client has about a broker’s commerciality tend to evaporate. Promoting transparency is also a clear mission of the Financial Conduct Authority which, according to its website, ‘acts to ensure that a [financial services] firm has its customers at the heart of how it does business, giving them appropriate products and services, and putting their protection above profits or remuneration.’
How can a broker communicate its integrity in the face of such scrutiny? Each broker should first establish where it stands on this debate and enshrine this position in a policy and code-of-conduct. For most, this will be a straight forward process. Demonstrating company-wide adherence to this policy is much harder to achieve, however, particularly when the FCA auditor comes knocking.
Many brokers still rely on the experience and knowledge of individual advisors when profiling affordability and matching them to loans in the firm’s portfolio. This is a broken system. As the loan market continues to proliferate, brokers are expanding their portfolios far beyond what a single advisor can evaluate in isolation, making their eventual product recommendations unreliable. Firm-wide consistency of approach, if it is ever achieved, is impossible to measure and, as a result, equally impossible to demonstrate to the FCA.
The introduction of smart technology platforms enable brokers to overcome these challenges. Automated cloud-based tools can now enable advisors to compare an applicant’s lending profile to their firm’s entire portfolio of available products, matching clients to loan products using a wide variety of pre-determined factors. Not only do these platforms arm advisors with a vastly superior system for reviewing and recommending products, they also enable the firm to hardwire its selection policy and code-of-conduct into the evaluation and application process, providing the transparency needed to allay the nagging concerns of both the client and the FCA in the process.
By enabling higher quality client-to-loan pairings, the likelihood of loan applications being granted by the lenders also increase, delivering efficiency gains across the entire lending chain from client, to broker, to lender and back again.
It is, of course, possible that the most commercially attractive product for the broker is also the most suitable for client’s financial circumstances, but that won’t be the case every time. Trade-offs are inevitable. As the loan market continues to expand, brokers must adjust how they operate if they are to maintain the trust of their clients and, at the same time, meet the stringent demands of the sector’s watchdog. The right technology can turn this adjustment from a compliance headache into a serious business opportunity, one which can enable faster growth, more successful applications, better client servicing and a stronger reputation. With all this in mind, the sooner brokers embrace transparency as a business imperative, the faster they will prosper.