Richard Brown spent the day with industry experts sharing intelligence at the ninth FLA Motor Finance Convention held at the Williams F1 Conference Centre in Oxfordshire.
Governance, particularly the coming of the Financial Conduct Authority (FCA), but also the behaviour of staff, dominated the addresses and discussions of the panel at the ninth annual Finance & Leasing Association (FLA) Motor Finance Convention.
Although Stephen Sklaroff, director general of the FLA, congratulated attendees on rising finance penetration in the past year, while the wider credit market contracted, migration of regulation to the FCA and the potential imposition of the Financial Services & Markets Act (FSMA) presented the "biggest challenge in decades". The possible application of rules which governed a deposit-takingmarket meant the FLA would focus its lobbying efforts to ensure the government fully understood how this would affect the sector.
Sklaroff added the March 2014 deadline for the new rules, which still required months of work, and their immediate implementation was "impossible". Sklaroff assured delegates the FLA was raising these points with government departments and, the previous week, at the House of Lords, asking for much current regulation to be kept instead.
There were two further problems, said Sklaroff: new capital adequacy requirements were yet to be resolved and the Financial Services Authority (FSA) appeared keen, despite misgivings from the industry, to have lenders and intermediaries self-regulate by a system of appointed representatives.
With 2,000 dealers, a fifth of retailers, now approved by the FLA’s Specialist Approved Finance (SAF) scheme, Sklaroff hoped to see the online standard accredited nationally. He added the "jury’s still out on whether there will be a practicable solution" to the next stage of SAF, which may include self-regulation depending on the new statutory regime, but was aware finance managers might not want another burden.
Responding to Sklaroff’s points, Kirstin Green, deputy director, consumer and competition policy, at the Department for Business, Innovation and Skills, who works with the Treasury on shaping the FCA, said the government aimed to encourage responsible lending and borrowing, including increased freedom, empowerment and protection for consumers to choose credit, coupled with the administration’s intention to "drive rogue companies out of the market".
Although Green recognised the "good job" of the Office of Fair Trading, which will hand over many credit controls to the FCA, the changing pace of the market, including instant loans, required a "world-class regulatory regime" which could respond to gaps inprotection while placing a "proportionate" burden on business.
Keeping but amending the Consumer Credit Act would entail parliamentary delays and become "unstable" and "inconsistent" alongside the FSMA, said Green, whereas a new body could respond better to a shifting market. The FCA would mean scrutiny over market entrants and stronger and faster administration. Consumer products that were unsustainable or misleadingly advertised would be banned, but new participants would not be stifled, and the government was preparing a series of roadshows to clarify industry expectations.
"Ministers are listening," said Green, and 2013 will see "extensive consultation" on the changeover. Asked about the Consumer Credit Directive and educating consumers, Green said the government recognised there was a "job to do".
Although increasing the amount of information available did not always improve clarity in finance, Green said lenders could find alternative ways to make products understandable to consumers.
Asked if the industry could receive clearer direction from rule books, Green replied "that must be the objective" and confusing regulation was "no good for anyone".
Asked if captives could compete with banks on access to funds, and therefore competitiveness of rates, Graham Wheeler, managing director of Volkswagen Financial Services, said the company’s access to capital had been increased on 21 November with a £1.6bn bond listing.
Liquidity for everybody, banks included, however, would become temporarily more difficult from the start of 2013 although Wheeler hoped rule-change campaigns would see liquidity become more available to finance companies from the Bank of England, as it had done for banks.
Sklaroff added he had written to the Chancellor of the Exchequer, also on 21 November, to address why such schemes had been restricted in their coverage, and to underline the demand for UK lending which had yet to be "captured".
He also hoped the proposed ‘business bank’ under Business Secretary Vince Cable would get lending to uncovered sectors. Green replied her colleagues and the Treasury would be interested in stimulating non-bank lending.
With 85% of all car sales now starting on the web, Wheeler said the future of car finance in the UK was tied to the progress of online retail while the most important issue to captives was now the "integration of brands, dealers and finance companies".
Retail outlets such as Audi City in London, were the future of finance – able to read a smartphone when it entered the premises in acustomer’s pocket, retrieve a phone number, e-mail address and search history; present a 3D model of a car with bespoke finish outside an image of the customer’s house; and tailor a finance deal to access the ‘money-cycle’ in a customer’s life.
Mark Squires, chief executive of Benfield Motor Group, continued the theme of advancing technology in the showroom and raised the question: is it this the end of the controlled selling process?
The average car buyer now makes only 1.3 dealership visits (according to 2012 Google research), but surveys 18 websites before purchase, including social media and peer review sites, according to Squires, with no one site dominating. What was needed, therefore, was the "stickiness" of a site, one which could serve as a single-stop information page.
The "old school" of advertising on price, but not discussing price at the showroom, was over, said Squires, and has no "buy-in" to the cycle of car ownership. F&I managers who were not "aligned with this customer journey" may instead be the "bottleneck" at the end of a 90-minute sales process.
Squires proposed instead a "new school" of "empowered selling" and "transparency". Salespeople should be there to relax customers with information.
So far, Benfield has found forecourt staff registering a 48% engagement rate and 49% conversion rate with customers, resulting in only a 23% true sales conversion rate. To increase this, the company has placed an emphasis on skills training, the customer experience and making follow-up calls.
Supplying the macroeconomic outlook for the day, Innes McFee, from the chief economist’s office at Lloyds TSB, reminded delegates the UK economy was still 3% below its 2008 level despite recent growth figures.
Recovery had been hindered, said McFee, by the burden of debt, government austerity, the eurozone crisis and regulatory changes. Although the banking union and European Central Bank had improved prospects in the past six months, the eurozone was defined by a lack of spending in markets with low GDP, contrasted with spending in high-GDP nations, and not encouraging anybody’s economic outlook.
Regulation, said McFee, came down to whether the government wanted banks to hold increased capital and / or liquid assets, and could create a "speed limit" once the recovery begins. Currently, regulation was responsible for a "nasty feedback loop" of constrained credit and sustained credit risk levels, leaving the government to start considering alternatives.
With little equity in housing and high inflation curbing consumerism, cars won’t "drive the UK out of recession", warned McFee.
David Challinor, managing director of The Funding Corporation, added the government was not concerned, despite noise fromthe industry, about the increasing number of people written off at the first credit check, often on criteria previously ignored.
The US situation had "raised everyone’s awareness" of the non-prime sector, defined by its concomitant "litany of irresponsible lending", which has left £1.4trn of total personal debt in the UK, £156bn of which was consumer debt, and 300 people declaredbankrupt and 1,200 County Court Judgements processed every day.
Regulation, therefore, worked in customers’ and the industry’s interest to make a "considered and informed" decision on finance. The Funding Corporation, and its retail arm ACF Car Finance, used advanced filtration, starting at the first contact with a customer, to leave a "tiny" default rate compared to most mainstream lenders.
Any customer would be given a "vast amount of detail" and "every reason and opportunity to say no" to a loan, and literature and SAF-approved salespeople were present at all ACF showrooms to explain finance.
The average successful applicant spent four hours in dialogue with The Funding Corporation and, for Challinor, leaving no doubt that the outcome was the same thing as Treating Customers Fairly, although this meant repeat business was "virtually non-existent, for all the right reasons".
From the collections side of the industry, Claire Selvidge, business development manager at Anglia UK, explained that while debt management before the credit crisis had been dominated by fast terminations and a high number of repossessions, volumes of both had peaked in March 2011 and the past six months had seen a decline, with no reason for the trend to change in the next six months.
The turning point, she said, had been the reduced funding and tighter underwriting of 2008, coupled with the rise of captive funders, which reduced the risk on lenders’ books. After the "initial glut of defaults" customers had chosen to manage their affairs better.
Selvidge instructed lenders to be aware of the FLA’s codes of conduct pertaining to debt management, which set a benchmark for repossession agents, consumer confidence and verification.
Of all worries a lender could have over collections agencies, however, the most important was information storage, and companies should check the data security employed by any third party.
Agents should be FLA members, advised Selvidge, and hold formal ID at all times, follow professional document procedures (including for property), and record all calls.
"An agent is an extension of your company. We don’t want anybody out in the marketplace representing your company with a criminal record," noted Selvidge, who added Anglia would like to see such recommendations "standardised across the industry".
Considering how to fight Satisfactory Quality complaints, Joanne Davis, partner at DWF, highlighted that although the Financial Ombudsman Service (FOS) could look at evidence confidentially, it may also penalise the lender when the supplier is at fault.
Compared to going through the more "consistent" courts, which allowed for the potential recovery of costs, the FOS was not bound by English law and held no right of appeal.
While the Ombudsman will name and shame companies, advised Davis, it will consider the impact on a business before it acts.
Although courts may look at wider complaints, the FOS allows some evidence the court could not. Alternatively, the FOS will not hear cross-examination evidence or evidence from a supplier if a case is brought against the lender, but the courts would. The risk then was the lender becoming "piggy in the middle" of a customer-dealer stalemate at the FOS.