The Financial Conduct Authority (FCA) has made changes to the definition of income between consumer hire leases and consumer credit after a response to its consultation by ten leasing businesses including Henry Howard Finance, Kennet, 1pm and Tower Leasing.
As it stood, FCA fees for regulated credit agreements such as hire-purchase were based on the interest charged, but fees for regulated hire agreements were based on the total rental payments. As a result, the FCA ‘levy’ on a £20,000 hire agreement was around £20 per year compared to £5 per year for a similar credit arrangement.
The regulator said it had taken the “helpful and well-considered responses” from the ten leasing businesses on board and had made changes to its proposed policy, which should take effect for the next financial year and on the regulatory fees for 2019/2020.
The FCA wrote: “We invited discussion of the impact our definition of income might have on income reported for consumer hire agreements, and views on whether we should consult on revising it. A number of firms have argued that fees may be higher on consumer hire agreements than on comparable unsecured loans. Our definition requires firms to report total revenue from consumer hire agreements as income, whereas consumer credit lenders are able to deduct repayments of principal, reporting only the interest and any other financial charges. The consultation reviewed the differences between unsecured loans, hire-purchase (HP) agreements and consumer hire agreements, and how these might affect reported income and fees.”
“In the case of credit-related activity, the key consideration is whether the service is ancillary to the provision of consumer credit or consumer hire, or whether the credit or consumer hire is ancillary to the service,” wrote the FCA.
“For example, if a television is hired by a retailer, under a regulated consumer hire agreement, and the hire charges include an element in respect of servicing, the entire hire charges constitute ‘income’. The service contract is ancillary to the consumer hire. On the other hand, if the service contract is provided by an unrelated third party, and the relevant element of the hire charges is simply passed to them, then it would not be recorded as income by the retailer.
“A different example might be where a firm provides payment merchant services to a retailer, and as part of this hires some equipment to the retailer. The hire agreement is ancillary to the merchant services (rather than the other way around), and it is open to the retailer to obtain the services without also hiring the equipment. In this case, the firm’s reportable income comprises the hire charges for the ancillary equipment, rather than also including the merchant services.”
Jason Davies, formerly of Onepm Finance, now working as a project manager at Henry Howard Finance, said that the clarifications were good news for the leasing industry.
“The effect of this will be to significantly reduce the FCA fees paid by many companies across the equipment and vehicle leasing industries, and ensure that other consumer credit firms pay a fairer share of the regulatory system,” said Davies.
“This will benefit all lessors (ironically a lot of bigger companies will benefit far more than those of us who have pressed for the changes) in these sectors and should be seen as a major achievement.”