Funders are increasingly prepared to fine dealers who do not comply with the terms and conditions of the funding contract. Used and demonstrator facilities provide dealers with the greatest opportunity to commit fraud, even if it is sometimes non-wilful.
Essentially the dealers themselves are responsible for determining what inventory they wish to fund and when, and the audit process traditionally kicks-in retrospectively. So for example, dealers may fund units which they neither own (prior to transferring title via the agency) nor have in their control.
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Despite the availability of data from HPI and Experian, funders are still lacking the absolute knowledge and certainty that their security is what the dealer purports it to be. As the funder determines the audit frequency, dealers have ample opportunity to cover their tracks, either by remedying the violation prior to the next (anticipated) audit or, at audit, providing fraudulent paperwork to deceive the auditor.
Despite attempts to harmonise the audit process and get funders to talk to each other about common issues, particularly where two or more competing funders are providing facilities to the same dealer or dealer group, there’s still a reluctance by the funders to embrace the technology and support available to them proactively. This is probably because audit and dealer control do not enjoy a commensurate level of resource within the business as other more high-profile activities.
In the UK this activity is now almost entirely outsourced. Twenty-five years ago audits were exclusively covered by in-house ‘new business’ orientated personnel, which obviously compromised them as there was clearly a conflict of interests.
It’s difficult to determine the precise level of funding, but taking all facilities into account including new inventory funding the figure will probably be somewhere in the region of £50/80bn.
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By GlobalDataNew vehicle registrations have now hit a five-year high. This level of activity in turn fuels the demand for used cars and demonstrator stock. However, net lending has fallen. Some funders, in particular the non-bank-owned or manufacturers may be reluctant to increase their lending or, indeed, lend at all because of the inherent risks involved, despite the recovering economic position and therein lies a problem.
Dealer networks in all sectors need to fund the increased levels of inventory and without a ready supply of funds the prospect of desperation and lack of dealer integrity will only increase.
At the start of 2014 it was announced that a US business would begin stock funding in the UK, targeting 200,000 used vehicles within two years and interestingly or possibly more frighteningly they intend to advance 100% of the wholesale value. This could be a recipe for disaster.
While the impact of a failure in this US business will not have serious repercussions in terms of stakeholder exposure, if it fails there could be further ‘lock down’ by UK funders. This is significant because two of the largest providers of wholesale funds are substantially owned by the British taxpayers/government.
So who is responsible for overseeing the activities of all these financial institutions. Well, essentially, they all set their own agendas.
While Sarbanes-Oxley legislation and capital adequacy provisions impact on the overall businesses, there seems to be very little direct impact on how these businesses conduct themselves.
The Financial Services and Markets Act will not directly supervise or regulate this type of lending, thereby deflecting any potential and specific involvement by the Financial Conduct Authority. The Office of Fair Trading oversaw the regulatory activities of the dealer groups in relation to their interface with the consumer more as credit broker rather than their terms of reference with their funder.
Risk mitigation – the solution?
The irony is – there is a solution. But it would need an organisation like the FCA, by using its position and influence, to help unlock the information contained within mainly government agencies to take the risk of lending away. This is entirely feasible and, I believe, worthy of some serious discussion.
The funders have a right as beneficial owners of the inventory, by virtue of the agency agreements that predominantly protect their cumulative interests, to information relating to that inventory. With this information the exposure to loss to the stakeholders in the funding businesses can be significantly reduced or even eradicated.
Agencies like the DVLA, MID and the SMMT in concert with provenance suppliers such as Experian and HPI should be encouraged to support such an initiative that could create a risk-free environment for funders by way of a continuous and automated monitoring of dealer inventory.
They are then free to lend within parameters established by the FCA in collaboration with the Finance & Leasing Association which interestingly has been unresponsive to any risk mitigation issues in relation to this activity when approached in the past.
There is sufficient merit in establishing a resource to supervise specifically the activities of these organisations, to create an environment where they are encouraged to lend with little if any risk of losses to the stakeholders of the businesses.
richard.jewitt@cumberlandsecurities.co.uk
