I am bored with all the faux outrage over every statement that comes out of the White House. I can’t believe that I’m going to quote Piers Morgan, but he recently said that: “Outrage should be saved for outrageous things” and I thought that was quite apt. Therefore, this article is (from here on) going to be 100% Brexit and Trump free. Let’s get back to discussing the industry that matters so much to us all.

Ever since I set up Funding 365 and entered the bridging market, it has been a continual mantra of the industry that “relationships” are the key to being successful in this market. Since then, we have made some great friends in the industry and have met some excellent professionals. I will even concede that some of our competitors have set up and grown superb businesses. I think it is, therefore, fair to say that we have built up some good relationships as we have grown our business.

However, given our continual push to make bridging finance a more professional and reputable industry sector, I can’t help but wonder if the focus of the participants on relationships is actually entirely misplaced.

It seems to me that when I hear industry participants talking about their relationships, it is invariably a lender discussing their relationship with a broker, or vice versa. With only a few exceptions, I have never heard a broker or other lender talk about their relationship with a borrower.

In a simple commercial agreement between a lender and a borrower there is no need for a relationship (other than a legal one). The parties agree how much the loan is for, how long and how much it costs. That’s simple. However, when you bring an intermediary into the mix, this is where things get significantly more complicated morally and legally.

•   Bridging lending reaches £2.8bn in 2016
•   BTL underwriting changes could prevent bridging exits
•   Average bridging rates drop to 0.78%

The job of the intermediary is to (typically) advise the borrower. Should they take a bridging loan at all, if so, what sort of rates they should expect at a particular loan size and do they have the means of repaying it without risking a default? The broker, at this point, also has a fiduciary duty to obtain the desired loan on the best possible terms for the borrower. Unless the broker has been explicitly clear to the borrower that he will only source loans from (say) two specific lenders, they should approach every credible bridging lender who can provide this loan to ensure that they get the best terms for the borrower.

It is at this stage that I wonder whether “relationships” are actually damaging to the borrower and, by consequence, to our industry. In the above instance, I start to worry about the incentives that lenders provide to brokers, some are tangible and some are softer. For example, not all lenders provide the same procuration fee to a broker. The broker, therefore, has an immediate conflict of interest – should he recommend the cheaper loan to the borrower or the more expensive loan with the higher procuration fee? Should he filter the majority of his business to a lender given an overall “volume target”, after which future procuration fees increase? Should he filter business towards the lender who most recently took him out for a golf day (relationship building)?

Some brokers/packagers will tell the industry at large that the above conflicts don’t affect them as they have a “sourcing system” which filters the most appropriate loan to the most appropriate lender. In the bridging industry, this is simply a smoke screen. Given the complexity of most bridging loans, in the vast majority of cases it simply is not possible to tick boxes on a system to determine the most appropriate loan.

In summary, I think it is important to understand that the above are real conflicts that brokers/packagers have to manage on a day-to-day basis. We should support a broker culture whereby they feel comfortable approaching multiple lenders with every deal and support full disclosure of fees and costs (including procuration fees) to borrowers. At Funding 365, we also believe that an industry-wide push to have the annual percentage rate of charge on every loan termsheet would really assist brokers and borrowers in their decision-making process. I would be interested to hear arguments from participants who do not think this would be helpful (and why).