Dr Roger Gewolb analyses recent press coverage of
the subprime world and the Cattles debacle.
No doubt well-intentioned but woefully
misguided souls have recently attempted to write about the future
of the non sub-prime world and link their conclusions to
essentially unrelated factors, such as the horrendous events now
slowly unfolding at Cattles. I hope to cover both of these matters
in this brief article.
Why should the events at Cattles delineate the
future of UK sub prime car lending, I ask myself? The 22 March
Sunday Telegraph has referred to “an alleged accounting
fraud” at the group and a magazine article says “it seems that its
internal governance procedures were woefully inadequate, and the
assumptions in its business model were wrong. So much so that its
results have been misreported for at least the last two years.”
At this stage, it is unclear to me from the press
whether it is a case of inadequate governance and control
procedures or outright fraud, or for that matter whether there was
anything done improperly at all, but what bearing does any of that
have on non-prime lending generally? If they are present, fraud,
poor controls or bad models can wreck any business, from the most
toffee-nosed private banks to the local minicab outfit.
And, if collections and provisioning are not done
accurately in any finance company, once you start to mess up or
play around with your arrears and bad debt numbers, you not only
misrepresent to or deceive your management and staff (those not
involved themselves, that is), shareholders, lenders and others,
but you also put yourself in a position where you do not even know
where you actually are (how can a finance company keep two sets of
collection records? – think about it) and your collections and
arrears management go out the window.
Thus, in the case of Cattles, £700 million of new
provisions, as has been announced, could very easily arise, once
outside experts are called in to try to rewrite the past, if indeed
provisions have had to be accelerated due to any inattention to
business from not knowing what to actually work and when.
It is very simple – for any lender, if a case is
inadvertently or improperly shown as current or almost current when
it is not, how can any collectors work that case as it should be
worked? How can they repossess a car when the account is shown as
less adverse than it really is? How can they sue when required?
Next, what about the collections team? How do you
tell someone to start doing it completely differently? In my
experience, taking on my first ailing business, I had to use a new
broom to sweep out some managers and then build up the junior
collection staff; most of them became highly effective, and we
collected much more than was projected – it can be done.
Obviously, with the Cattles situation, any “toxic”
loans that may be found will first have to be ring-fenced and
worked in a different manner, but even they can be collected to a
significant degree if the right experienced, professional team is
in place managing things.
Further, and also peculiarly to Cattles, another
common sense fundamental seems to me to be out of sync here – how
can they possibly close every one of their Welcome Car Finance
(WCF) sites as recently announced? Are their repos now going only
to auction? Did they never use WCF to retail their repos?
If the answer to either or both of the last two
questions is “yes”, I should think it is very much a Cattles
business model issue, rather than a sub-prime lending model issue.
By sending all repos to auction for auction value instead of the 90
percent or more of trade value others can still get from a retail
site, they could in effect be throwing away one-third or more of
their possible recoveries for no earthly reason I can think of. I
wonder if the 20-odd banks to which Cattles owes some £2.5 billion
are aware of this?
Access to credit
So how can this Cattles situation have
direct relevance to the growing band of economically challenged
people who cannot readily get car (or other) finance today? The
government has long been concerned with the exclusion of these
citizens from the world of credit and wants something done about
it. With the rapidly increasing number of these people as a result
of the present recession, I can only see this desire and this need
There are good lenders and less good. Even Cattles
can be made into a good lender again, given the right ingredients.
Now is the time. My view, shared by almost everyone I know in our
industry, is that there has never been such an opportunity to do
sub-prime business on one’s own (risk-controlled and highly
I also believe that, once the current situation has
passed, things will go back to pretty much the way they were, even
if the terminology alters. In my view, this has always been more a
crisis of confidence and trust than anything else.
There will be securitisation on a massive scale
again, albeit in somewhat different form; there will be rating
agencies and the rest. Mortgage lending will be limited on the
loan-to-value ratio so as to avoid a repeat of the most obvious and
egregious malpractices of the past years. But I will go out on a
limb and say that motor finance in the UK will be relatively
unaffected when it returns.
Even sub-prime will return, undoubtedly also with
lower more sensible LTVs than some lenders used. It can be one of
the most successful sectors in British financial services if it is
developed correctly this next time.
The author is a well-known motor
finance industry and subprime lending expert, and can be reached at