Posted on 18 February 2016
Exactly six years ago, a giant of the broker world was on its knees. Struggling to cope with not only the collapse of the mortgage market but also high legacy costs and reported debts of £7m, John Charcol entered administration on 22 February 2010.
Many firms imploded during the financial crisis, but when one of the market’s oldest and most highly regarded brokerages – and a place where countless numbers of the sector’s best-known personalities had made their name – hit the wall, the gravity of the economic situation was brought home.
The firm had been co-founded in 1974 by John Garfield, Charles Wishart and Colin Studd, whose first names gave the brokerage its name.
Abaco bought the firm in 1984 before itself being bought out by British and Commonwealth Group two years later.
The next 30 years saw various changes of ownership. In 1989 the brokerage underwent a management buyout and in 1998 US venture capital firm Warburg Pincus purchased a majority stake, with Garfield retiring at this juncture.
In February 2000 Bradford & Bingley bought John Charcol outright for £102.5m and dropped the ‘John’ prefix, rebranding the broker as Charcol. But four years later Garfield led a management buyout and the firm regained its independence, reverting to the John Charcol brand.
Within a few years the credit crunch hit and, when John Charcol entered administration in 2010, Towergate Financial, the insurance broker’s financial planning arm, swooped for the fallen firm, rescuing it from oblivion.
The story does not end there. Fast-forward to March last year and the brokerage transferred to yet another pair of hands when a consortium, including current chief executive Simon Knight, bought it in a deal worth £8.6m.
Despite its turbulent history, the firm’s situation feels different this time around and one gets a sense that its past upheavals are behind it.
When Mortgage Strategy visits John Charcol’s City-based headquarters, the mood at the brokerage is calm but jovial, punctuated occasionally by the noise of the sales floor when its door opens and then closes again.
And Knight, the man tasked with reawakening the sleeping giant, has returned home, having begun his career in financial services in 1987 with a two-year stint at the broker.
So what has changed in that time?
“It is more a question of what hasn’t changed,” says Knight. “There are some components, like the culture of the business, that are the same as they were back in 1987 when I was first here.
“In some respects the business is, without a doubt, unrecognisable because we are a regulated industry, which we weren’t in those days. But there are many people who have been here through every iteration of Charcol. That is what hasn’t changed: the culture, the people, the technical expertise, the entrepreneurialism – which make it a joy to come to work every day.”
A familiar face from Knight’s first stint at the firm is Ray Boulger (see box at bottom of page), Charcol’s long-serving technical expert and the winner of this year’s Mortgage Strategy Outstanding Achievement award.
There is little doubt that Boulger is the mouthpiece of the industry as far as the national press is concerned – although his contribution is far from confined to media soundbites.
“You’ll be hard pressed to find someone with a greater depth of understanding and knowledge of the mortgage industry than Ray,” says Knight. “There are some fantastic people in this industry but Ray stands out as one of the few truly technically strong people. He has always had that technical knowledge – but more importantly, he has an opinion.”
He adds: “He is an ambassador, not just for John Charcol but for the mortgage market as a whole. He contributes to policy with the FCA, the Treasury and the Bank of England, and he is on the board of the Association of Mortgage Intermediaries. He really is someone who has made a massive contribution not just to our business but to the industry as a whole.”
As part of the deal to purchase Charcol last year, Palatine injected £5.4m into the firm, which has been used to ensure it can operate as a standalone business.
“The focus for us in the past 11 months, since March, has been on putting in place the infrastructure that we needed to take the business to the next step,” says Knight.
“A lot of that is people, systems and a long list of things. While the firm was owned by its previous owner, finance, IT, HR and compliance – to name but a few – were all functions that were carried out by the parent company. So now we have to create those functions and build a senior management team that wasn’t there before.
“Walter [Avrili, Charcol’s managing director] managed the other business very successfully under that other ownership, so he’s now got the added benefit – I hope – of individuals who are solely responsible for those functions within their world. We have invested massively in new people and are in the throes of a new systems implementation.”
Aiming for growth
Once those systems are in place, Knight says, the coming 24 months will be focused on pursuing strong levels of growth.
He says: “If I was to summarise what we have done so far in one line, it would be: laying the foundations to get us to a point where we can build on that throughout 2016 and 2017. In 2015 John Charcol grew in line with market growth; in 2016 and 2017 we are looking to outperform that.”
A key contributor towards that growth will be the second charge market. In January, Charcol bought Southampton-based second charge brokerage Simply Finance Group for an undisclosed sum. As well as adding 30 advisers to Charcol’s existing 85-strong advice team, the deal meant it was set up to offer second charge advice when the Mortgage Credit Directive launches next month.
Knight foresees immense opportunities in the sector. He says: “If you want to talk about sleeping giants, then [the second charge market] is a sleeping giant. It is a very developed market in other countries – in the US, for example – but seconds in the UK, until recently, have been fairly niche and distributed through a core set of master brokers. If you go back a few years, they were usually associated with the sale of a single-premium PPI policy, with high interest rates.
“Over time, we have seen a natural reduction in interest rates, but the biggest single change is moving away from the Office of Fair Trading to the FCA with the MCD coming through. If you look at your process for a second charge, it’s very similar to that for a first, and we believe it is becoming a commoditised product and will no longer be a niche.”
However, Knight thinks the seconds market may lose some of the underwriting flexibility it has become known for.
“There are two schools of thought there,” he says. “One is that second charges have offered more flexibility of underwriting, which under the new EU regulations will be less obvious.
“Having said that – and this is why I think it will become commoditised and mass market – we are in a massively low interest-rate environment and some people have never witnessed anything other than this low environment. So the opportunity to not have to disturb your existing mortgage, to put a second on it to take out equity rather than disturb the existing tracker or fixed rate, or to avoid repayment penalties, or to maintain yourself on an interest-only loan that you couldn’t get if you remortgaged – that is mass market.
“To do it at rates that are low single figures means the blended rate is still super-competitive and gives the borrower that much more flexibility. I think that is why, in the future, second charge will be spoken about in the same way that a remortgage is spoken about today.”
Recently the regulator has been examining competition in the mortgage market with a view to launching a full-scale review if it deems it necessary. However, Knight believes there is “plenty of competition in the market”.
He adds: “I would like to see where the issues are that people feel need to be fixed. There is an enormous number of intermediaries in the market and an enormous number of lenders; and interest rates are where they are.
“The barriers to entry for a consumer appear to be more around their credit risk as opposed to fees or the interest rates people are charging. So I am not sure if I can think of a more competitive industry, to be honest.”
That said, he urges new lenders to carve out a niche for themselves so they are not chasing the same customers and can better serve those who have been abandoned by others in the market.
“At what point does everyone start chasing the same customer?” asks Knight. “You need margin – but where is that margin going to come from?
“It is not an obvious strategy to be a ‘me too’ so you have to find something that causes people to look for you. I think new lenders have to be more creative and launch with a clear target market in mind – whether that is complex buy-to-let or a special type of bridging finance or some type of second charge loan.
“For me, one of the biggest opportunities is lending into retirement. That is a vast market and it is still not fully catered for. Anyone who is going to put effort into finding a solution for that is to be applauded. So there is definitely room for more players in the market but not if they are just going to be the same as the next guy.”
An area arguably in more need of innovation than any other at the moment is buy-to-let, given the amount of Government intervention of late. Not only has it announced a stamp duty surcharge of 3 percentage points on rental properties and second homes from 1 April but it will gradually reduce tax relief on buy-to-let interest payments from 2017. Moreover, the Bank of England’s Financial Policy Committee will soon be given powers to contain the sector if it deems it necessary.
The stamp duty consultation suggests there could be a carve-out for landlords holding at least 15 properties in a corporate structure. However, a decision had not been made when Mortgage Strategy went to press.
But Knight believes the market will survive such heavy intervention.
“One gets used to these things. I subscribe to the view that if you take a buy-to-let you take it for the long term. A 3 per cent hike in tax is not welcome but, if I take a long-term view and look at the capital growth, it will be something that, in a year or two’s time, I will not be thinking about. In that respect I think the market will weather it – although I’d rather it didn’t happen.
“The tax relief part will have an unexpected component, which is that rents will rise. If you’re faced with increasing costs, what are you going to do? Sell your house? No – you’re going to put your rents up. And because this is being phased in over time, it is giving landlords the opportunity to adjust slowly.”
He adds: “Buy-to-let will remain a good investment opportunity. If you’re in it for capital growth, as many people are, it is still an excellent investment. We have had no let-up in interest in buy-to-let and we are seeing a very measured, sensible reaction by our customers about it. There is not a panic and there is not a mad rush to do something about it.”
Guaranteed need for expertise
Knight is also bullish about the prospects for the broker market, which currently has a 65–70 per cent market share, depending on which figures one uses.
“I think about what I would do if I needed mortgage advice,” he says. “Would I take the time to do all the homework, call my institution to run through its process and have something suddenly come up that wasn’t expected? Or would I go to an expert? I’d go to an expert every single time.”
Knight is not alone in believing the broker market has a bright future – and this will help him as he rebuilds and strengthens the sector’s biggest name. Who better to do that than someone who used to call Charcol home?
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