Half of Britain’s SMEs believed they would be impacted by a no-deal Brexit, the FSB said, but only 14% were prepared for such a scenario. More worryingly a third of small businesses are simply in no position to prepare for a no-deal Brexit. Surprisingly most small business owners, even at this late hour are taking a wait and see approach. After all, how do you prepare for something when you don’t know what’s going to happen? You can invest now and spend a lot of money trying to protect your business from something that might never happen. Or you can wait and see what is actually agreed. But there are some basic steps that almost any business owner should consider in order to insulate themselves from the current economic uncertainty.
Mortgage brokers, in particular, may feel as if they have been here before. Ever since the financial crisis brokers and independent financial advisers (IFA) have had to adjust to a new normal where mortgage approvals are 40% below their pre crisis level. Unlike the Financial Crisis however we have all known Brexit is coming for the past two years. And even in the softest Brexit scenario the Government forecasts the UK economy will be 3.9% smaller in 15 years’ time compared with if Britain stayed in the EU.
Review your Cash flow
So what to do? One of the most obvious, but consequently most easily forgotten, is to ensure you have enough cash flow to continue to operate after Brexit. To do this you should estimate all the cash inflow and outflow of your business on a weekly or monthly basis. If you are unsure how to do this, seek help. Use the process to consider if there are any changes that you can make. A cash flow forecast will help you identify any difficult periods such as a potential collapse in house prices. If, as the Bank of England has suggested, average house prices, fall by as much as 30% in the event of a chaotic exit from the EU, there will be an immediate impact on property transactions that is likely to impact on the cash you hold in your business. To put this in context property values fell 20% in the wake of the Financial Crisis a decade ago. Transactions volumes fell from 1.65m to 730,000 in a year.
Review how profitable your business really is
If your business suffered a sudden loss of income, could you cope? If finance charges were to increase, how much would this affect your bottom line? You should review whether there are any changes that you could make that might streamline your business. If you operate as a sole trader would it make sense to share resources with another mortgage broker to save costs? Alternatively is your mortgage network, club or packager relationship working well for you? These are the sorts of questions you should ask yourself ahead of Brexit. Leaving such things until afterwards could be potentially damaging to your business. Meanwhile if your business is already suffering from financial distress or simply stressed, the earlier you obtain advice, the wider the range of solutions that will be available to get your business back on track.
Review your Professional Indemnity Insurance
It is well documented that Brexit has already put the brakes on property transactions in Britain but mortgage brokers also have to be mindful of their clients. Those that are buying property now with small deposits will be the most vulnerable to an economic shock that impacts on house prices. So how you advise them will prove crucial. It would be wise to check your professional indemnity (PI) insurance covers you sufficiently for any claims that could be made against you. If a hard Brexit pushes some of your clients into negative equity you will need to ensure you have adequate PI cover to fight claims that you gave poor advice.
Be prepared for fewer products…
Another potential problem that may occur in the immediate aftermath of a hard Brexit is that mortgage lenders could withdraw mortgage products. European banks, like Santander could, theoretically, lose the right to sell financial products in the UK overnight . This could not only impact on clients just days away from completing the purchase of their home, and the inevitable collapse of the purchase, but mortgage brokers who would be left to deal with the fall out and any subsequent loss of procuration fee. Regardless of whether your clients are buying their first mortgage, want to remortgage or their current deal is near to ending reviewing their circumstances with them now will ensure they, and you, are well prepared for whatever happens in the months ahead.
…and higher interest rates
Higher interest rates in the event of a no deal Brexit also cannot be ruled out. The Bank of England has based its inflation and economic forecasts on the assumption of an orderly Brexit. But the impact on the economy may be such that the Bank is left with no choice but to hike interest rates A rapid series of rate hikes to prevent a flight of capital or shore up Sterling would have a very dramatic effect on borrowing costs for many households and on the availability of mortgage products. Once again mortgage lenders would most likely remove products that no longer reflected the new reality of rising interest rates. Even if they replaced those products quite swiftly, the extent of the challenge posed by monthly rate hikes, could see mortgage products available one day and gone the next. Much may depend on how much market share mortgage lenders want to retain.
It’s not all doom and gloom
How Brexit impacts on your business and on your clients only you will be able to say for sure. But it’s probably worth taking heart from the fact that 99% of UK businesses are owner managed SMEs that do little, if any, trade with Europe, and this is particularly true of the UK mortgage industry. But some small preparations should mean most mortgage brokers can ride out the worst effects of Brexit.
Date: 19th March 2019
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