Challenging the scaremongers

Article published in Fleet Leasing

Earlier this year the Bank of England initiated a review of the provision of motor finance to UK consumers, instructing the Prudential Regulatory Authority (PRA) to check how resilient lenders’ balance sheets would be in the event of a market downturn and instructing the Financial Conduct Authority (FCA) to look at whether industry practices were harming to consumers.

Very little additional information has entered the public domain since then. The FCA’s ‘Business Plan’ said only that they are “concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry“, and that it “will conduct an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance“.

Some of the newspaper headlines at the time caused a chill wind blow through the boardrooms of fleet leasing and motor finance companies and through the corridors of the BVRLA and FLA. These articles questioned whether the motor finance market was “heading for a crash” or rife with “loan mis-selling”; suggested that that car salespeople “earn thousands of pounds” every time a customer signs an agreement and even wondered whether “mis-sold car finance could be the next PPI scandal”.


On first reading these articles related solely to PCP sold through motor dealers. However, as the initial announcements referred to the sale of motor finance products to consumers, we may assume that this exercise will include the sale of PCH and PCP by fleet leasing companies. FN50 companies are big players in consumer finance, having written 156,000 new PCP and PCH deals last year.


Frankly, some of those press articles were appalling: poorly researched and lacking balance.


The fact is that most of the industry’s customers are very happy with their PCP or PCH agreements. The industry has invested heavily since the FCA arrived: rewriting procedures, recruiting and training staff and reprogramming systems to ensure that customers not only get the products they need and want, but make fully-informed decisions and are treated fairly.

The PRA is responsible for promoting the safety and soundness of financial services companies whilst the FCA is responsible for ensuring that customers are protected.

The PRA’s review will look at what would happen should interest rates rise and GDP fall. Would defaults increase, what would happen to residual values and what effect would this have on lenders?

The FCA will look at whether there is adequate transparency in the market (whether products and firms’ roles are understood by the consumer), whether lending is responsible (i.e. if consumers can afford the financial product and it is suitable for them) and whether there are conflicts of interests (arising, for example, from salespeople earning commission).

The review of the sector was triggered by the Bank of England’s concern that household indebtedness is high and rising relative to incomes, which might potentially cause problems for lenders with lax lending standards.

Household debt was at an all-time high of around 150% of household income just before the financial crash, then fell to around 130%, and it has now risen to around 133%. Of this, three quarters relates to mortgage borrowing.

Dealership car finance has grown by roughly 4.5% pa over the last few years, which suggests that it is rising rapidly. However, there is an issue with these statistics.

Historically, when people wanted to fund their next car purchase they may well have gone into their bank and taken out a car loan. This option is less popular now (in no small measure because of the guaranteed minimum future values and very low interest rates offered by manufacturer captive finance companies). So whilst the stats show that dealer finance is rising this does not accurately reflect the totality of motor finance. It is conceivable that total motor finance has remained static whilst the mix of deals within the total has changed, with more dealer finance and less bank finance.

Similarly, these statistics exclude PCH. A consumer who in the past only bought used cars might well have taken out their first PCH agreement in the last few years, attracted by the low monthly costs compared with repaying capital and interest on a bank loan. It is possible to argue that this change in behaviour is very much to the consumer’s benefit but in the stats it simply looks like one more new car has been sold via a consumer funding agreement.

It is reasonable to assume that the FCA, having dealt with major concerns about payday lenders, are now focussing on the motor finance market primarily because of the size of the market rather than because it is concerned of any specific bad practices it wishes to squeeze out.

The BVRLA and FLA are both actively working to help the regulators understand how the market works and putting forward the industry’s case.

If your company is not active within BVRLA or FLA committees, and you have insights or ideas about how the market might be improved that might be worthwhile presenting to the regulators, now might be an excellent time to discuss these with the trade bodies. It will be far better to present ideas to the regulators now rather than simply waiting for them to bring forward new draft regulations.

These are some of the point that are no doubt being made by the trade bodies to the regulators:

  1. If the FCA is concerned about competition, it should be aware that, as far as industry practitioners are concerned, competition has never been fiercer.
  2. If they are concerned about price transparency, perhaps more could be done to better educate consumers about the products they are buying. Lenders already do a lot to help consumers make informed choices. Perhaps the next big step would be to move forward with interactive video. This is a nascent technology in which the viewer watches a video clip and must then click to answer a question correctly to confirm their understanding of the issue, before moving to the next step of the video. An audit trail is retained as evidence of compliance.
  3. The systems used by UK lenders to determine creditworthiness and affordability are the envy of lenders in other countries.
  4. Levels of arrears and repossessions are historically low.
  5. Customers have been attracted to low interest or free insurance/low deposit deals, but this is a good sign of a healthy market rather than a sign that something is working against the customer’s interests
  6. PCP offers customers the right of withdrawal, protection against merchantable quality issues and options at the end of the contract that deliver huge, often unsung benefits for the customer. PCH offers RV protection and a very simple product proposition (effectively, a simple form of long term rental).
  7. The ombudsman, BVRLA, FLA and FCA get few complaints from the industry’s customers.
  8. Other than in scare-mongering newspaper headlines, is there any evidence of a growth in irresponsible lending? However, if the regulators’ reports fail to give the industry a clean bill of health this could encourage ambulance-chasing operators to turn their attention from PPI claims (which are now coming to an end) to our industry. “Have you entered a PCP or PCH agreement in the last six years? You might be entitled to claim! Apply now!” A nightmare scenario. If encouraged to believe they had the right to make some sort of claim, many customers would stop making their monthly payments – which could indeed cause problems to lenders’ balance sheets.
  9. The industry is proud of what it does. PCP and PCH are great products for the consumer: good for competition, the economy, the environment, manufacturing and the customer.
  10. The growth in motor finance has come about because people have felt more confident about acquiring a new car in recent years because the macroeconomic environment has been benign: low interest rates, high levels of employment, low risk of redundancy/unemployment, a strong economy, high residual values. It is therefore unsurprising that people have felt more confident about entering into these deals.

If you have any thoughts on these points or have insights, ideas or data that could help the BVRLA or FLA in their discussions with the regulators, now might be a good time to provide these to them.

Professor Colin Tourick



How to be a disruptor

Article published by Asset Finance International

The International Auto Finance Network runs conferences where senior executives from the auto and fleet finance industries can meet, network, discuss the key issues in their markets and look at the major opportunities and threats that lay ahead.

I have been fortunate enough to have been involved with IAFN from the start, which has given me a very good perspective on the things that these executives think about when they are pondering the future direction of their businesses.

Most of these businesses prepare a SWOT analysis as part of their planning cycle, where they look at the Strengths and Weaknesses of their businesses and the Opportunities and Threats they face.

And most of those SWOT analyses will have an entry in the Threats box entitled ‘Threats from disruptors’.

So who are these disruptors, where have they come from, why are they suddenly such a big deal and how can an established auto or fleet finance business stave off the threat of disruption? Those are the topics we will cover in this article.

Disruptors arrive in an existing market and offer highly attractive products or services that threaten the existing ways of doing things. Typically, the people in these companies are young, have recently graduated and are highly tech-savvy.

As with most business start-ups, most of these businesses fail. This is for a variety of reasons including lack of experience, management skills or funding,

Sometimes they go off in completely the wrong direction. A good example would be the company trying to sell a digital Loyalty Card scheme to the owner of our favourite Italian restaurant. The concept, they explained, was that diners would get credits every time they came in for a meal, and after nine meals they would be entitled to a free meal at any restaurant on the scheme. When our Italian friend pointed out that his restaurant was the best in town, and that diners would be able to accrue credits in cheaper restaurants and only turn up at his place for free meals, they went very quiet and said they’d go away and think about it. They haven’t come back.

Which probably tells us something simple but important about successful disruption: if you decide to invent a new mousetrap you must make sure it works.

Most disruptors look at old problems in new ways. In some cases their technology is remarkably cheap and they get to market very quickly. It doesn’t seem to matter if their offering is immature or incomplete. Most technology is launched in a fairly basic state anyway and then refined over time, and consumers have come to expect this.

The best protection against disruption is to innovate and become a disruptor.

If we were inventing mousetraps we’d be able to patent them but in the world of asset finance and management it’s next to impossible to protect ideas, so your best protection is to keep at least one step ahead of the competition.

Disruption is a journey, not a destination. You will always be refining your product and will get things wrong. In fact you should expect to get things wrong and should budget for this. Experiment – a lot. Try things out on a small scale, ramp them up if they have promise and don’t be afraid to dump them quickly if they don’t seem to be gaining traction.

And don’t bet the shop on any one idea. At any point in time you should have several innovative ideas at various stages of development; some minor, some major and some game-changing – disruptive.

Getting the timing right is important. If you can deliver a product that works, just when the client is beginning to feel the need, you’ll do much better than if you launch too early (before the client knows they have a problem and you have to spend ages explaining why they need your product) or too late (in which case someone will have beaten you to it).

Disruptors seem to need a particular mindset. They need to be tenacious and focussed of course, and to be able to carry people with them. But they also need to be iconoclastic – willing to attack the existing ways of doing things even though it won’t necessarily make them friends at the outset.

This is interesting because you probably have people like this in your organisation right now. That guy in Finance or the lady in Sales who never seem happy with the way things are done? Typically, these people are tolerated or ignored: after all, your business works in a certain way and has done so for years, so why change things? In the new world of disruption though, these people become your internal secret weapon. They see things differently, aren’t afraid to challenge the staus quo and offer an alternative vision of the future. Use them.

Innovation labs create an environment in which ideas can be encouraged, fostered and grow. Give a small team of people a problem, a budget, access to key internal people and a timescale and leave them to do their own thing. If you like what they are doing you can implement it, if not you can dump it and won’t have cost too much. Make sure you have the right people on the panel that reviews the team’s ideas. You need people who aren’t scared of change.

Measuring demand for a new product or service is really difficult, so what can you do if you generate a massive surge in demand that you can’t cope with? You need to build this into your plans. You may need to have resources (people, business partners, management, etc) on standby – briefed and ready to react – if demand skyrockets. Outsourcing might offer a good solution, though it takes a lot longer to negotiate an outsourcing contract than to refocus resources that are already within your control.

At an IAFN conference last year the Head of Automotive at Google said that the business world was changing faster than ever and that in order to compete we should be working faster than ever before. This is a good benchmark. Is your company working ‘harder and faster than ever before’ or simply doing the things it has always done with a bit of fine tuning? Or, to paraphrase Jack Welch, ex General Electric, if things outside your business are moving more quickly than things inside your business, you’re doomed.

IAFN research identified that many auto and fleet finance companies are investing in new digital ways of doing business. If not you’re amongst them you’re going to be left behind. Investing to keep up with the competitoion isn’t enough, you need to forge ahead into new ways of doing business.

If you don’t have the internal resources to change the way you do things, or maybe lack people with the vision or experience to challenge the status quo, that’s nothing to be ashamed of – you’re in the majority. So what should you do? You could bring in external consultants, though most consultancies advise but don’t have the resources to deliver the solution. Or you could talk to leading edge suppliers to your industry – software vendors, data suppliers, niche consultancies and potential outsource partners – and companies in similar industries, both B2B and B2C – to gain new insights and perhaps a vision of the art of the possible. Only then can you decide how to forge forward.

Disruption and innovation can arise in multiple ways but it will be worthwhile – perhaps essential – to look at some emerging technologies and see how they can be applied to your business. You need to become familiar with artificial intelligence, big data, deep learning algorithms, automated process flow, modern CRM workflow, cognitive computing, predictive analytics, machine-learning and natural language processing. If you mainly rely on a website to communicate with your clients, you’re way behind the pack.

Rather than aiming to increase the bottom line by 5% next year, why not ask how you might increase it by 100%? And perhaps the bottom line shouldn’t be the place to look first, because if you want to transform your business it should perhaps come from top line revenue growth first rather than bottom line profitability. The bottom line is of crucial importance of course, but if you start with the bottom line in mind and you could get bogged down with thoughts about cost reduction rather than thoughts about explosive revenue growth, and that’s where you need to be.

Interestingly, in the brave new world we live in, it seems that an awful lot of people don’t spend much time looking at the bottom line. Just look at the extraordinary valuations of some giant companies that have yet to turn a profit.

And that’s what managers are there to do – deliver shareholder value.

It’s time to move Disruption from Threats to Opportunities in your SWOT analysis.

Professor Colin Tourick