Paul Harrison, head of motor finance at the Finance & Leasing Association, speaks to Mike Cobb about a successful 2013 and the changes facing the industry in 2014
This year may prove to be one of the trickiest years for the industry in a long time with the change in regulatory control looming over the dealer networks and finance industry alike.
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As we enter 2014, however, the statistics for the motor finance industry over the previous 12 months make for good reading. Sales are up, and penetration into consumer sales is at an all time high.
How much of the rise in new car sales has been influenced by the Finance & Leasing Association(FLA) membership’s activities however?
"Dealer finance, has played an important part in bringing buyers back to showrooms," says Paul Harrison, head of motor finance at the FLA,"it helps make car purchases much more affordable because it spreads the cost of the car over, typically, two to four years for your average agreement."
"Our member’s penetration of new car sales has steadily picked up now over quite a few years since about 2009, so we’re up to now about 74.2% which is a big old chunk of the market. So it’s been increasing over time."
Moreover the figures were much as the industry had estimated. "That absolutely matched the expectations. For the used car sector, we saw the value of finance provided shoot up by 18% as well, to give you those two sides of the coin."
PCP lends a hand
A lot of that increase has been driven by the increasing use of PCP finance to ease the purchase costs for consumers.
At November’s FLA Motor Finance Convention, the hosts, Mercedes Benz, admitted that the take off in PCP had caught their marketing teams by surprise. Was this the same for the finance professionals?
"Not particularly if we’re honest," says Harrison. "PCP agreements have been a mainstream product now for a few years.
"It is of course in its purest sense a variation of HP anyway. But the PCP share of the market has been increasing for a number of years, so it hasn’t come out of nowhere if you like, its been steadily increasing. To about the point now where PCP agreements account for about 70% of consumer new car finance agreements, at least those written by FLA members."
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By GlobalData"And I think PCP for the industry is very much a customer retention device. And for the customers, they benefit from the three options at the end of the agreement as well."
"Feedback from our membership is that customers typically opt to enter into a new finance agreement," continues Harrison.
It is an observation which matches statistics from remarketer’s and companies like Glass’s showing an increasing age and mileage in the used markets.
"But also PCPs are becoming more popular for the used car markets as well; our figures show that about 25% of used car finance agreements are now funded through a PCP deal. Although naturally that would be the newer used cars, rather than the older used cars."
Does this rapid increase in sales volumes cause problems for FLA members when it comes to capital? "The market has been performing strongly now for a number of years and FLA members have been able to meet this demand for sometime," says Harrison,
"The membership is expecting the market to be flatter this year, purely because of the strength of growth we have seen in 2013 and 2012. That rate cannot carry on indefinitely. But obviously there’s a whole host of factors which underpin that."
Although it is not a primary role of the FLA to get involved in the capital raising for their members, they have begun to see trends for the coming year in their members plans for expansion and finance. "One thing we have seen in our quarterly motor finance confidence survey, is an indication from our members that, both in the price and availability of that wholesale funding, they are pretty optimistic for the future. It is currently available on good terms but they are expecting to quite naturally pick up and become more expensive when economic conditions change," comments Harrison.
A capital idea
Capital is not the area that Harrison believes will see a need for growth in 2014, however.
"What I would say is, in light of how good the market has been recently, a couple of the lenders are planning to naturally increase their headcount over the next 12 months or so. In fact the latest FLA confidence survey shows that around 40% of motor finance firms expect to increase their headcount over the next 12 months."
What the FLA had not captured in their data was an estimate of much the numbers would rise on the 6,500 currently employed in the sector.
Despite the need to increase staffing numbers the market is not expected to grow at the same rate in 2014 as it has done in the previous two years. "Our members were very happy with market conditions last year and the demand they saw was very strong, and I think you know with that background, people are managing those expectations for this year."
"All things being equal, economic conditions not deteriorating, which certainly people are not expecting to happen, people are expecting this year to be fairly flat."
Harrison’s comment matches the Society of Motor Manufacturers and Trader’s estimates of only 1% growth in new car registrations for 2014.
2014 holds most trepidation in what will happen on and after 1 April when the Financial Conduct Authority (FCA) takes over regulation of the consumer finance market from the Office of Fair Trading (OFT). Already the market has expressed some concerns over aspects of the new regime and its implementation, with more work still to come.
"We remain very concerned, on behalf of our members, with the government’s time table," Harrison says.
"We have been consistently raising that with very senior FCA officials ever since the timetable first came out. Let’s be clear, though: it is not really of the FCA’s doing. It was something that the government imposed on them and frankly they have got to work with."
And the FLA’s lobbying has not gone unheard.
"I think we all have a very good working relationship with officials at the FCA; they are always very happy to meet with us, to talk through our very long list of issues, as you can imagine, and I think we have been very impressed by their willingness to learn, and to listen to our concerns. We have been very pleased with how co-operative they have been."
Noses to the grindstone
But the FCA can only be so co-operative and the timetable remains fixed on 1 April leading to considerable work at the FLA and among members to be ready on time.
"It’s all guns blazing really to the first of April this year, when the FCA will formally take on consumer credit. There is a huge amount of work to do for the sector, in a very very short period of time; that is lenders making the necessary system changes,
document changes to refer from the OFT to the FCA, as well as full belt and braces review of their sales processes, their relationships with intermediaries, whether that’s brokers or motor dealerships. "But, stepping back from that, I think this is much more fundamental than operational and technical issues"
The way the FCA will operate is set to change the way the market is overseen the according to FCA, says Harrison.
"As they have said themselves, they will be regulating the market in a very different way. A way that is different to the OFT, that is going to be much more intrusive and hands on. And the FCA will have far greater enforcement powers to go with that as well."
"The FCA has already said that OFT guidance will also be brought across to the consumer credit regime as well.
"The difficulty there of course is that we have what is guidance from the current regulator, the OFT being brought across to a regime which doesn’t necessarily recognise guidance, it recognises rules, and they are two quite different things." Harrison, therefore, predicts extra burdens will be laid upon the motor finance industry despite early assurances by the FCA this would not happen. The consequences of this extra burden and the short timetable for could be serious for the industry.
"I think the government and the FCA has acknowledged within the cost-benefit analysis that there will be some market exits as part of this regime. I think they previously quoted between 15 and 20% of small firms, including intermediaries, may leave the market.
"And that is very concerning," says Harrison.
Out and in
"Bigger firms will be used to working under the FSA regime as was, so are used to the Fsma, [The Financial Services and Markets Act] way of working.
"So their degree of knowledge and working within that regime is much higher. I think because of that level of knowledge it will be a surprise [to see larger firms leave the industry]"
But, while some firms may leave the industry after the dust of regime change settles, new entrants are sure to come into the UK market and with them perhaps a new vision for the way they deal with customers, Harrison believes.
"I think we all know that consumers do all of their research now for car purchases online. I think the online channel lenders and dealers are always looking to develop further.
"Whether that is through social media in order to build that relationship with the customer at a much earlier stage of the sales process, or whether it’s simply what should the specific routes to the sale be."
To smooth the transition in innovation and regulation, the FLA themselves are working on a number of initiatives in 2014. Some of this is to improve understanding of the consumer and other projects will be in an effort to enhance the skills of the dealer network.
A new qualification
"We developed a revised version of our ‘financing your car’ web site last year which is just to ensure that customers are more informed before they go into the showroom," explains Harrison, but for the difficult year ahead he sees the Specialist Automotive Finance (SAF) training initiative and dealer kite mark the FLA runs as being more important for the year ahead.
"There is a real opportunity here for our SAF initiative to help dealers with their compliance and with their understanding of the new regime," he says. "We will be updating our SAF reference material, and also the test questions, later this year. It helps lenders work with their dealers to prepare for the significant change.
Harrison says the FLA is also separately working on what he hopes will develop into a new "advanced SAF qualification".
"It’s very much at the development stage at the moment, but we are working with the Institute of Financial Services, as we have done in recent years on the asset finance side, to develop a brand new SAF qualification.
"It will be pitched at a more senior level, a business manager or equivalent, to help them develop their own professional knowledge."
After the success of 2013 for the motor finance industry, this year promises to be one of significant change, and, for the FLA and its members it is likely to a very busy one.
