For what, on paper, appears to be only a small part of the asset finance market, the broker channel attracts much attention. In this article, I explore why brokers are more important than they might first appear, and why the health and vitality of the sector is so important to the leasing industry’s future as we move out of the Coronovirus crisis.
How important are brokers?
According to the FLA statistics, brokers generate around 20% of total new asset finance business.
One reason this sector matters so much is that at least a third of the largest lessors, according to the Asset Finance 50 ranking survey, rely on the broker channel for the majority of their origination. This includes independents and smaller banks alike.
However the 20% figure only tells part of the story. As shown in the graph, which is based on my new survey of the UK’s largest lessees (covering 375 lessees with over £5m of non-property leases), around 57% of the overall market is leasing to small and medium-sized businesses, which is where brokers predominantly operate.
This would suggest that the broker channel accounts for around 35% of SME asset finance by value, and given the smaller deal size compared to direct business, closer to 50% of all SME leasing transactions.
BREAKDOWN OF UK LEASING MARKET
Source: UK Top Lessees 2020 Survey, Asset Finance Policy
Who are the brokers?
Since I launched Asset Finance Policy, I have aimed to maintain the only comprehensive list of UK asset finance brokers. In 2014, I identified around 500 broking firms (firms, not individual brokers) that specialised in asset finance, together with around 100 general commercial finance brokers that appeared to have particular asset finance expertise. (I don’t include all brokers, for example I exclude firms operating without websites or individuals acting as agents or appointed representatives of other brokers, but most other firms are included).
That number has dropped over the past six years. My latest broker directory, updated this month, lists around 450 firms of which around 350 are dedicated to asset finance.
That’s a fall from around 500 to 350 specialist asset finance broking firms in six years, a net attrition rate of around 25 firms per year.
To some extent, this is to be expected due to the demographics. Many brokers are former senior regional banking professionals who left the banks 15 to 20 years ago. Inevitably some of these highly experienced professionals have retired.
Yet seeing the numbers of brokers fall is disappointing on several grounds.
First and foremost, because asset finance brokers have such a vital role to play in supporting small businesses, offering face to face local support that is so lacking elsewhere in the financial services industry.
Second, despite some high-profile exceptions where some of the largest brokers were able to sell their firms, typically with lengthy earnout periods for the key individuals, most brokers retire unable to pass on their businesses. There aren’t many professions where it’s quite this difficult to pass on a well-established business.
Third, it’s unfortunate that some brokers appear to have decided that FCA regulation is too much bother. Despite the bureaucracy, most independent brokers find that the FCA regulation isn’t too time-consuming and delivers some benefits too. Being FCA authorised should be business as normal for asset finance brokers.
What’s happening now?
This crisis has been tough on brokers, with firms working incredibly hard to support their existing clients with little prospect of earning commissions for some time. There remains substantial uncertainty, although brokers’ resilience and dedication will help to see firms through the crisis.
There are some positive signs:
Despite the overall fall in numbers, new broking firms are being formed, often by experienced people from asset finance lenders
Many brokers have successfully diversified, offering a wider range of SME finance options, whilst retaining their asset finance roots
It’s early days, but lenders will be comparing their loss rates for broker-introduced business with vendor and direct channels. This is when the strong knowledge brokers have of their clients may really prove its worth
And the future?
The broker channel is even more important than the headline numbers suggest. Its ongoing health and vitality are critical to the leasing industry’s future. So it’s concerning that numbers of broking firms are steadily falling, and this seems set to continue without a concerted industry effort.
At present, it’s tough for an individual from outside of the asset finance world to set up as a broker. They might join an existing firm as an employee, agent, or appointed representative, but they would struggle to set up a new independent broking business.
The question is, does it have to be that way? Are the barriers to entry logical and necessary? Should it be easier for brokers looking to retire to sell their firms? Does the current situation serve the best interests of SMEs that are likely to need brokers’ support in the recovery?
With the prospects of there being highly experienced finance professionals leaving banks and other finance companies, now might be the right time to consider how to attract new brokers to the asset finance industry.
Readers may wish to see the comments posted by readers on LinkedIn: https://www.linkedin.com/pulse/taking-stock-asset-finance-broking-amidst-outbreak-julian-rose