Broker-lender partnerships are the way forward for the
industry, says Richard Hoggart
This year is the 20th anniversary of DSG Financial Services Ltd.
Over that time we have seen the market take many twists and turns
through several recessions and booms. We have seen many funders
enter and leave both the broker arena and the motor finance market,
and many brokers have come and gone.
While it seems both these trends will continue,
there is, in our opinion, a new opportunity to change the landscape
of the funder broker relationship for the future.
To quote a word often used by the head of the
leading non-prime lender (he knows who he is), the nature of the
relationship between funder and broker is too “transactional”. By
treating each deal as a single transaction, the broker is being
true to his definition but not creating a platform for longevity.
Nor, by encouraging this practice with the structure of commission
packages, is the funder.
Long-term, the relationship often breaks down when
bad debts begin to grow, debit-backs kick in and both parties often
just move on to a new partner.
Venturing forth together
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So how can we change this cycle during this key
time in the industry? In DSG’s opinion, the joint venture model is
the long-term key to a successful, mutually responsible
relationship. The broker takes on the duties of the sales division,
and the funder takes on the duties of looking after risk,
underwriting and collections. Both profits and losses are shared on
the book as it grows and matures.
This model has been working well in the market over
the past few years with a small number of brokers and funders, and
I am surprised it has not been replicated by others.
The key to the success of this kind of relationship
is primarily long-term commitment. Both parties have to realise
that the understanding of security in the relationship is critical
to the growth of the portfolio. Additionally the broker needs to
shift mindset from short-term gain to one of long-term increased
profitability, being prepared to take a share of risk for the more
likely greater reward.
This movement to future revenues can impact a
broker’s cash flow; an understanding of this, and therefore support
from the funder, is crucial. The funder has the increased benefit
of a partner who is much more focused on quality and efficiency,
but must commit to sharing much more information on pricing,
underwriting, collections and arrears than historically would have
been the case under the traditional transactional relationship.
There will always be a place for the existing
practices of brokers, but for the long-term good of the industry,
the shared risk and shared reward model looks like the best bet for
longevity of the sector. As we exit recession and credit crunch and
move into more positive times, with hopefully new funding looking
to enter the market, what better time to make this transition?
The author is managing director of DSG