At the end 2015 and the start of 2016, a few people mentioned to me that they hoped the Financial Conduct Authority (FCA) was going to stop being such big news this year, and that other things would start to come into focus.
The hope was that, with the majority of the industry soon to be through the authorisation process, and with everyone involved now having a bit more of a handle on the other side (not that I would dream of classifying the FCA and the industry as on opposing sides), things would begin to go a lot smoother.
To an extent that has come true and we have not seen as many big stories as, say, the FCA’s decision to make huge changes to how gap insurance is sold at dealerships. But, despite this, the FCA has remained a spectre that people certainly still want to talk about. I only need to look at the web traffic for a recent story about the FCA mentioning motor finance in its review of high-cost credit to see that the regulator very much remains a hot topic among professionals.
As it should be. While the majority of people are no longer going through the process of getting authorised, everyone is still operating under the eye of the regulator. And there have been rumours that the FCA may soon be focusing its gaze on the industry.
Both the aforementioned high-cost credit review and the senior manager’s regime are obvious examples of why the FCA will probably remain of interest for readers looking to stay in business next year, and they are not the only reasons, by a long shot.
This is not to say the whole year has been dominated by the FCA. We have had some good times as well.
Although there has not been the flood of new money entering motor finance that we saw in 2014 and 2015, there have still been some exciting industry moves – most recently including Maxxia’s acquisition of Eurodrive – and plenty of new products.
One of these that caught my eye was Santander’s PCH product. Since it launched I know of at least one manufacturer which has begun using that product.
The FLA has mentioned before that PCH has begun to grow quite rapidly in the UK space. Admittedly this has been from a low base, and it is still notably smaller the either HP or PCP, at the last count. But the way things are going, it might not be too long before it catches HP.
I am curious to see if 2017 or 2018 will start to see the product make any headway in the used car space. Certainly there are large swathes of the used market where PCH will not work, but I would be curious to see if there is an area where it could work, and if we will see anything there.
This is all related to the general move from ‘ownership’ to ‘usership’ that everyone has been talking about. When I mentioned earlier that we had seen less money coming into the market this year than before, one area of investment we have seen an acceleration on is manufacturers buying technology start-ups.
I am not going to list them here, as there have been so many, but most of the medium and large manufacturers have invested millions in buying equity in small, agile, fintech companies.
Some of these have been in areas like carsharing and ridesharing, and it’s clear most manufacturers have kept an eye on Uber and its ilk to assess the opportunities and threats for them there.
While the number of people replacing owning a car full-time (or leasing one, at least) with carsharing remains relatively small, it is growing, nonetheless. The long-term question here is will it ever grow enough to start threatening traditional vehicle sales (and as a result, finance)?
By investing in companies in these areas, manufacturers are clearly looking to make sure they remain relevant, regardless of the answer.
Another area in which companies have invested heavily is the development of electric cars, and autonomous technology.
For me, as a consumer, electric cars are just starting to get to the point where I could see myself buying one. The infrastructure to support these cars has developed, as has the range of most models, to the point where two of my biggest problems with electric cars have faded. In both cases, there is obvious room to improve, but the signs are there that this will happen in the future.
There are still one or two issues I have, however, chief among them being price. Simply put, they are too expensive for me and for most of the market.
According to the most recent SMMT stats, about 3.6% of cars sold this year were classed as ‘AFV’, and this number is growing every month.
At some point there is going to be a sizeable number of these vehicles returning to dealers, at which point both dealers and independent lenders are going to have to figure out how to make the proposition of these vehicles more acceptable to drivers. As things stand, EVs are improving rapidly, and most people will be worried about battery degradation.
The other area is autonomous cars, which have barely left the mainstream national papers in 2016.
Two things are perfectly clear in this area: Things are developing rapidly here on a technological front, and that we still have some way to go before the dream of a car driving itself around a city can be fulfilled – both from the cars themselves and from a technological point of view.
The press around this has been helped no end by the rise and rise of Tesla, and the intrigue around what Apple and Google might (or might not) be planning to do in this space.
The rise of autonomous cars and the rise of usership models are likely to be linked in the future, and in the long run these will also impact on car finance.
How all this plays out will be fascinating to watch and I am sure there are going more questions before we get answers.
Naturally, Motor Finance will be here to report on all these developments, and more!
Jonathan Minter, editor, Motor Finance
Over 86% of private new car sales now take place using finance provided by FLA members, and many customers make their repayments by direct debit. Against this background, during 2016 we have been seeking improvements to the Direct Debit Guarantee Scheme, in particular to ensure that opportunities for fraud are minimised. While it is quite right that customers are protected, we have discussed with Bacs and the Payment Systems Regulator a number of practical ways of ensuring that fraudulent claims are discouraged. These include possible limits on the age of claims, better investigation processes, and improved means of challenging disputed claims.
In another important area of fraud prevention, the FLA’s industry standard for financial crime prevention in motor finance credit application processing has been updated to take into account new technologies for identifying and verifying customers, especially in online transactions.
During 2016, we also looked at a number of ways to develop the professionalism of the motor finance industry.
Building on the success of our Specialist Automotive Finance (SAF) initiative, our new higher-level Certificate for Automotive Finance Specialists (SAF Advanced) was developed in collaboration with the London Institute of Banking and Finance. In 2016 it attracted 258 students, and the first graduates were celebrated at a very successful Parliamentary reception in May.
Looking ahead to 2017, many FLA members will be liable for the government’s new apprenticeships levy. We therefore took the opportunity this year to start to develop a motor finance apprenticeship which could be used by member companies, dealers and brokers. We received initial approval for the new apprenticeship from the Department for Education in September, and work has now started on the curriculum.
In the regulatory arena, 2017 will be particularly busy. The Financial Conduct Authority’s (FCA) much-delayed consultation paper on affordability and creditworthiness will be of huge interest to the industry, as will the FCA’s thematic reviews of early arrears and staff remuneration.
Preparations to extend the FCA’s Senior Managers Regime to 56,000 consumer credit firms will also be in full swing during 2017, and the FLA will be working to ensure that the scheme – designed for banks and insurers – is rolled out on a proportionate basis in the credit markets. A realistic time frame will be needed to allow firms to put in place the required changes.
During 2017 we will also be re-examining the remaining provisions of the Consumer Credit Act in light of the recent referendum on the UK’s membership of the EU. We will be looking at those areas of the Act which implement EU Directives and which might now be amended so as to reflect better the realities of the UK’s credit markets.
Adrian Dally, Head of motor finance, FLA
2016 has been a tough year as more players than ever compete for a slice of market share.
This has come in several forms, including the growth of digital lenders and a rise in the number of high street banks which have set their stall out to capture what was traditionally dealer-introduced business.
While these developments pose certain challenges to finance houses, they should not be disheartened by this and should instead seek to differentiate themselves from competitors. This can be achieved by acting as a partner with car dealers – not a disruptor or a rival – which helps provide a great customer experience.
This year has also seen the continued growth of personal contact purchase, and this is now the most popular product for consumers within the industry. This is also true for Northridge, where an increase in demand for PCP means that these products now make up over 30% of our motor finance product sales.
In many cases PCP offers the best option for customers because it provides them with increased flexibility. However, it remains vital that the customer is always fully aware of all the product conditions and the industry must be careful to avoid reverting to the lowest denominators of longest term and highest residual value, instead offering the product which best suits the customers’ needs. We believe that it’s important that customers are in positive equity positions as they approach the change cycle.
2016 also saw a rise in voluntary terminations (VTs), and this is likely to be a continuing trend in 2017. Low-deposit deals and products which have been offered on the forecourt this year are great for the customer at onset, but further down the line can produce negative equity issues which then impact on VT numbers.
To that end, we might see the introduction of more conservative loan-to-value percentages in 2017 as VTs rise.
Looking to the year ahead, many experts – such as the Society of Motor Manufacturers and Traders – think that there will be a reduction in the number of new car registrations in 2017. However, this is offset by the belief that this may mean that used car sales remain strong, thereby creating opportunities for all participants in motor point of sale.
For Northridge, in 2017 we will continue to build, and enhance, dealer partnerships. Point of sale finance through and with the dealer is the best journey for the customer and we expect this to remain a competitive and popular choice in the marketplace in the year ahead.
James Mcgee, managing director, Northridge Finance
Reflecting on 2016, it was certainly a positive year for the industry overall. The continued resilience of the UK economy, despite the hurdles regularly put in the way, created a strong climate for both car sales and more interestingly capital availability in UK financial services.
Looking at the position of the capital markets right now does make one wonder as to where we sit in the current cycle. Certainly worth considering when we analyse 2016 and attempt to predict 2017.
2007 still doesn’t feel that long ago to me. Those who were active in motor finance at the time remember only too well the chain of events as funds dried up for a string of lenders that then fell into the abyss. The ones most quickly affected were non-prime players such as BCT and Park Motor Finance, affected by the sudden loss of cheap and loosely covenanted wholesale facilities.
If at the time, we wondered if we would ever see such flexibility for non-prime customers again, we didn’t have to wait too long.
Over the last three years this sector has absolutely blossomed. In fact, if we look at 2016, the availability of credit in motor finance has never been so liquid, certainly not in my 26 years in the industry.
This creates a very positive environment. We now have an incredibly competitive credit market. Dealers and of course customers now have a huge choice of lenders and most of them have multiple products priced for risk. The lenders themselves also appear to have a wealth of funding and multiple options to increase available levels. Such a level of choice can only be a positive thing, surely?
The saying goes that “Those who do not learn from history are doomed to repeat it.” All a bit dramatic sounding but it is a famous saying for a reason.
If we are to avoid the same catastrophic end to the credit cycle, it is going to need all the stakeholders to play their part responsibly. First, the providers of the funding need to be patient and realistic on the returns and the time it takes to achieve them.
They need to ensure that their clients have sensible covenants and that these are then reflected onto the criteria set and placed onto the market. Second, the lenders need to do the basics right. Keep LTVs close to reality, manage customer affordability responsibly and of course charge a fair price for the risks taken. Dealers and of course the customers themselves also have their own part to play.
So my Christmas cautionary tale ends. There is some potential to make the same mistakes again, however, I think the good news is that my experiences of 2016 tell me that there is enough awareness of the past to hopefully leave it there and the industry can continue to grow profitably in 2017.
Richard Hoggart, chief executive offier, DSG Financial Services
From Brexit to Bowie to Trump, 2016 has been an unpredictable and memorable year for many. So, as it draws to a close it is inevitable that we will reflect on the year gone by, and the key trends that have dominated the motor finance industry.
There is no major surprise that car finance continues to grow as the acquisition method of choice, with PCP going from strength to strength and conquering all before it. Elsewhere there are some signs that PCH may be taking off, but this is from a comparatively low base.
Brexit has been the word on everyone’s lips in 2016, with repercussions expected throughout most industries. For now, there seems to be no major impact on the market, but this is not to say that this will always be the case. It will not be until the situation develops over the coming years that we will see the real effect of Brexit on the industry.
Looking at growth in 2016, it seems to have slowed slightly, with less-strong growth in the second half of the year compared to the first.
According to Experian, default rates have started to climb and this suggests that there is stress showing in the market.
In terms of regulation, this is the year that it has really been embedded into the industry, as the expectations of regulators are now becoming clearer.
Each link in the development chain, from the dealer to the broker to the finance provider, is now taking its responsibilities more seriously. This has seen a significant change in the way firms operate, with customers now at the forefront of their considerations.
There is now a firm focus on regulations relating to customers, which includes ensuring that vulnerable customers are treated fairly and, most importantly, implementing effective affordability assessments.
2016 also saw the Motor Finance: Europe Conference and Awards 2016, which was held in Frankfurt, and brought together banks, leasing companies and automotive finance professionals. This was an exceptional platform to discuss key issues, debate new strategies and celebrate the excellence of prize-winning businesses.
Peter Minter, Chairman, Moneybarn
So far this year the UK fleet market has proved very resilient, and has provided momentum to a stalling retail sector. Figures for October showed fleet and business car registrations were up 3.4%, while retail registrations were down by 1.1%.
Fleet registrations have been the driving force behind new vehicle sales in the first 10 months of the year, with demand up by 4.2 % compared to the same period last year.
We have seen little impact of Brexit on the fleet market to date, and there have been some very attractive fleet deals in 2016.
But with the falling exchange rate of the pound against the euro, and the growing attractiveness of other European markets such as Italy and France, it remains to be seen whether this continues to be the case next year, or whether manufacturers start to deflect supply to other markets.
The UK has been a very attractive market for manufacturers historically, but most major manufacturers have been forced to implement UK price rises in recent months, typically of less than 5%, because of the falling value of the pound.
It remains to be seen what the impact on new car prices will be in 2017 if the exchange rate continues to fall. If there is little or no recovery, it would seem likely it will lead to further price rises and less attractive deals around in the fleet market compared to this year.
At the moment, the Brexit effect has been negligible, as evidenced by the continued growth in fleet sales, and we still remain optimistic about the outlook for 2017. But there is probably more uncertainty around in the market than at this time last year – and for a number of previous years, too.
Brexit-effect or not, a key fleet trend for 2017 will be the continued swing towards alternative fuel vehicles (AFVs) and away from conventional diesel or petrol vehicles.
Registrations of AFVs were up 12.4% in October and 23.3% for the year-to-date. There have been 75,987 alternative fuel vehicles registered so far in 2016 – the highest level ever achieved in the first 10 months of the year.
Changes to the company car tax system announced in the Autumn Statement, which will prioritise electric vehicles from 2020, seem set to increase their attractiveness further.
The changes reintroduced a BiK band for 0g/km vehicles which had been removed last April, and add a sliding scale for plug-in hybrid and range-extended electric models which emit 50g/km or less.
From April 2020, fully electric cars will be taxed at 2%, while vehicles emitting between 1g/km and 50g/km – plug-in hybrids and range-extenders – will vary, with BiK bands between 2% and 14% depending on how far they can travel on battery power.
At the same time, ultra-low-emission vehicles (ULEVs), currently designated as 75g/km of CO2 or less, have been given an exemption in the recently announced government crackdown on salary-sacrifice schemes – a move which is also likely to increase the attractiveness of this type of vehicle. We believe that manufacturers still need to do more to increase their ULEV offerings to provide drivers a greater choice and a wider range of appropriate models. But we are also certain that there are developments in the pipeline that will be ready for market in three to four years that will allow drivers to be able to take advantage of these new tax regimes.
In the meantime, company car drivers can still select attractive, low-emitting vehicles that are both New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale consumer used car finance market grew 12% by value and 9% by volume in October, compared with the same month last year.
The POS consumer new car finance market also reported new business up 8% by value and 1% by volume in October.
The percentage of private new car sales financed by FLA members through the POS reached 86.3% in the 12 months to October, up from 86.2% in the 12 months to September.
FLA head of research and chief economist Geraldine Kilkelly said: “The performance of the POS consumer car finance market in recent months has been very much in line with industry expectations of broadly stable new business volumes in the new car sector, and single-digit growth in the used car sector.”
and tax-efficient within the current tax regime. Company cars still remain a considerable incentive and benefit for many employees, and we believe that there will remain a strong demand for next year.
With mainstream company cars set to be less tax-efficient under government moves to limit the scope and attractiveness of salary-sacrifice car schemes, we expect to see a greater increase in personal contract hire and leasing as a consequence.
We are already seeing evidence of that now at Fleet Alliance where the proportion of personal leasing in our portfolio has grown from 5% to 19% largely from drivers accepting a cash opt-out or from business owners and directors.
We expect that to continue to grow as the numbers of vehicles provided through salary-sacrifice car schemes falls for the next three years or so, at least until larger numbers of ULEVs become available to meet the government’s criteria, at which point we may see larger numbers opting back into company rather than personal schemes.
But for now we remain reasonably bullish for prospects for the company car in 2017, and are looking forward to another year of growth and stability – but with possibly a few more Brexit clouds looming on the horizon.
Martin Brown, managing director, Fleet Alliance