UK asset finance

Why asset finance brokers should get accredited by the FLA

17 April 2024

Summary

During February’s Finance & Leasing Association (FLA) annual dinner, Chair John Phillipou announced the launch of a new broker accreditation scheme designed to drive through changes in the asset finance broker-lender channel that the FLA hopes will improve efficiency and increase both compliance and channel transparency.

The changes have been long planned but should be seen in the context of:

large-scale customer-initiated fraud originated over some years through the broker-lender channel that was discovered in 2022;
the focus by the FCA on intermediaries including worries about commission disclosure;
the FCA’s recent intervention in relation to discretionary commission arrangements in auto finance; and
possibly also concerns about rapid growth in the volume of business coming from new appointed representative brokers.

The FLA’s asset finance broker accreditation scheme is a key part of a wider effort to bring lenders and brokers closer together. It is believed that by establishing a forum through which lenders and brokers can agree how to better organise the channel, changes can be made effectively and through mutual consent.

The accreditation scheme is a first step and focuses on replacing multiple reviews (the process whereby a lender checks that the broker with whom they deal is compliant with relevant regulations and the lender’s own requirements) which are currently carried out individually by each lender on each of the brokers with whom they deal. Instead, it is intended that there will be a single broker review which will wholly or in part provide the same information for all lenders.

Asset Finance Connect (AFC) have found that the scheme has been met with scepticism by some brokers who have expressed doubts specifically about the value it delivers to them. Some brokers have raised worries that unless there is a common review requirement then the FLA review will only be one extra review among many and may add to their work.

However, during the recent AFC webcast focusing on the FLA broker accreditation scheme, a poll of brokers was conducted, and 44% of brokers believed that a single broker review which effectively meets most of the needs of lenders reducing the number and extent of reviews done individually by lenders will save brokers time and money (compared to just 8% who felt that it would not).

This is strong evidence that more brokers than not are in favour of the project.

The FLA scheme will evolve, according to Phillipou. And as it does it is expected to progressively deliver more value for both brokers and lenders. This may be enough to bring sceptical brokers on board.

The scheme is expected to cause lenders to move towards accepting a common review requirement which will address the concern that this is just an additional review and will hopefully deliver the intended value for brokers.

It is also hoped that the scheme will provide a common agreement about which actors in the channel fail to meet minimum requirements. It is feared that bad lenders (those who deal with bad brokers) and bad brokers (those who fail the accreditation process or have it withdrawn) bring the industry into disrepute, and increase the likelihood of damaging regulatory intervention.

Through its research during and after the webcast, AFC found a significant barrier to change to be the mistrust which is evident on both sides when lenders and brokers discuss how to change the way in which the channel operates. This mistrust extends also to the interaction between trade associations.

Some brokers have told AFC that they cannot see compelling value for them in the scheme. Many of these brokers feel that most of the value in the single review process will be derived by lenders. Other brokers accept that this is a starting point and see it as an opportunity for further discussion.

AFC also found a concern expressed by a few participants that the individual interaction between lenders and brokers builds understanding between individual lenders and brokers, and the scheme to delegate that interaction to a third party is counterproductive.

John Phillipou addressed this concern during the webcast pointing out that lenders will still have to have some direct and specific diligence of the broker (and demonstrate this to regulators), with the intention being to cover approximately 75%-85% of what is required with the FLA scheme.

Notwithstanding any concerns, there seems to be a common acceptance that without change there is at least a danger that the industry will repeat the experiences of auto finance providers and their dealer intermediaries.

Consensus and trust will make change easier.

This project appears to be one of several activities taking place in both associations which appear to be designed to build the consensus and trust which is a pre-requisite for making effective changes to the industry.

Webcast summary

Why now?

John Phillipou, Managing Director of SME Lending at Paragon Bank and chair of the FLA set the scene for the webcast.

The broker channel, he told attendees, has proven itself as an enormously effective channel for SMEs to access finance. As a result, many lenders’ businesses rely on it as an important route to market. But the organisation of the channel needs to change.

Phillipou referred to an “undercurrent of regulatory creep”. Lenders need to be able to show regulators (who may currently not even have responsibility for all of the sector) that their house is in order.

This became clear during the Covid pandemic when CBILS and British Business Bank support highlighted “linkage of responsibility” between funders and their intermediaries. This seems to mean that lenders are responsible for making sure the brokers with whom they deal are compliant.

Philipou also suggested that the current review of the Consumer Credit Act may change the definition which distinguishes regulated and unregulated business. Brokers who formerly operated outside regulation may not remain outside.

Phillipou suggested that regulators do not seem to fully understand the role and value of brokers in originating business. This view was held by most of the attendees. 95% of respondents polled in the webcast believed that regulators and policy makers fail to understand the benefits brokers provide for SMEs and the UK economy.

“The intention of the scheme is that we can pull together with the broker community and reflect that non-regulated business works perfectly well and that the asset finance industry has everything in order,” asserted Phillipou.

How does accreditation work?

Simon Goldie, Director of Business Finance & Advocacy at the FLA explained that the association is intervening now on behalf of lenders following a series of requests from FLA members who want them to provide a review for intermediaries on which all lenders can rely.

Goldie consulted with brokers to assess the benefits they would gain from the review.

He acknowledged that the FLA review will not necessarily replace lenders’ individual reviews but argued that it would reduce the extent of individual reviews.

The FLA review will operate using a digital portal where brokers can demonstrate they comply by answering questions online and submitting evidence.

Where a broker’s responses demonstrate a non-serious breach (Goldie used the example of compliance with privacy notices), the FLA will provide the broker with reasonable time to take the required action to remedy the breach before repeating the review process.

More serious breaches, either during or after accreditation (including complaints made by lenders) will be passed to an independent adjudication panel made up of people with relevant industry experience. The panel will determine if accreditation should be withheld or withdrawn.

In addition to providing a point of access for brokers to submit evidence of compliance, the portal will also provide FLA members with access to information about brokers which they can use to determine whether they wish to do business with them.

The accreditation service is voluntary for both brokers and FLA lenders. Lenders do not have to use an accredited broker and brokers do not have to be accredited.

Once accredited under the FLA scheme, brokers may join a ‘broker review working group’. This will provide a range of benefits including access to regulatory updates which Goldie said “is particularly important for brokers who are not members of any trade body. “

“We want to create a channel to speak to brokers and hear their concerns so we can feed that into our conversations with government and regulators.” he told attendees.

Costs and benefits

Brokers will pay an annual fee to be part of the broker scheme which will include the review. The review will be managed by a third-party independent assessment specialist, X VAS. The FLA justifies this one-side-of-the-channel-pays, asserting that the FLA has invested in the scheme using funds paid by lender members from their membership subscriptions.

To reassure brokers who felt they were paying for a review process which was formerly paid for by lenders themselves, Goldie said: “This is not just funder-led – we want to make sure there are tangible wins for brokers.”.

“This is not just a funder-led scheme – we want to make sure there are tangible wins for brokers.”
Simon Goldie

Benefits for brokers of the accreditation scheme include help with customers, as well as existing and new lenders to their panel.

The major benefit for brokers however is that the channel is preserved and protected, Mike Randall, CEO of Simply Asset Finance and a Board Member of the FLA added.

Randall said he was concerned about non-standard reviews carried out by some lenders.

Underlying this thought seems to be a worry that some lenders work with brokers who do not meet the high standards they should.

Broker concerns and involvement

David Foster, Managing Director at Anglo Scottish Asset Finance was the only broker on the panel. He believes that broker-lender collaboration is important; and also sees value in establishing a single audit process on which all lenders would rely.

He told delegates that, “brokers’ frustrations are centred around bureaucracy getting in the way of them doing their day-to-day jobs,” and if the scheme could help with that, it would be a benefit to brokers.

Foster is undecided about the value of the FLA broker accreditation scheme.

However, if other issues confronting the broker community including commission disclosure and lenders handing off risk to brokers could be overcome through a collaboration with lenders and brokers via the FLA accreditation process, then Foster noted that it could be “a sound offering and the way forward”.

Brokers wanted an assurance that the FLA will collaborate with them on the accreditation scheme.

Simon Goldie responded that the scheme is at the “start of the journey” and its aim is to find a process to work with brokers and their community to understand it better and to help it thrive. He confirmed that, “this project is about creating a forum where lenders, brokers, and the FLA can discuss, swap ideas and improve the good working of the industry”.

Goldie also said that the FLA wants to work with the NACFB.

What the future holds?

The FLA hope that the scheme will demonstrate to the regulator that the broker-lender channel is working effectively in asset finance, according to FLA’s Goldie.

John Phillipou believes that the FLA broker accreditation scheme will show the regulator that the asset finance non-regulated industry is “ahead of the game”.

“The FLA accreditation scheme is an opportunity to look forward and collaborate for the future.”
John Phillipou

AFC webcast about the FLA's new broker accreditation scheme with speakers including John Phillipou, Chair of the FLA

FLA broker accreditation scheme launched to improve efficiency and increase compliance and channel transparency
The scheme focuses on replacing multiple reviews with a single broker review
The scheme has been met with scepticism by some brokers who have expressed doubts about the value it delivers to them

Communities

European automotive

European equipment

UK asset finance

UK regulation

The value of brokers does not appear to be properly understood by regulators and policy makers who focus on their potential ability to do harm rather than on the enormous benefit which they provide to their customers and to the UK economy, in boosting productivity and providing SMEs with the fuel they need to grow

The overwhelming majority of delegates agreed that regulators and policy makers fail to understand the benefits brokers provide for SMEs and the UK economy

Find out more about the FLA's broker accreditation scheme by reading the review of our AFC webcast with John Phillipou

UK asset finance

Is AI changing the game for asset finance?

4 March 2024

Summary

Why are we so interested in AI?

Artificial Intelligence (AI) has been around for many years, starting its journey in 1956. But with the release and accessibility of generative AI applications such as ChatGPT, the AI phenomenon has exploded across the globe.

Sponsored by Lendscape, the technology session at the 2023 Asset Finance Connect Autumn Conference discussed whether AI technology will be a game-changer for the asset finance industry and the challenges the sector must face in adopting artificial intelligence.

Martin Goodson CEO of Evolution AI commented: “AI technology has fundamentally taken a step forward in recent years, and it is only now that we are becoming more interested in AI and the rewards it brings.”

Andy Trimmer, Head of Technology at Simply pointed out that AI as a subject has become increasingly conversational in recent years with the growth of AI infrastructure. Suddenly everyone can access AI and people are seeing the realisation of what it can do with huge breakthroughs from ChatGPT. As Trimmer noted, “It’s nothing new, it’s just become accessible.”

Over the past 18 months we have seen exponential growth in AI with massive breakthroughs every week, but Goodson highlighted that, once AI reaches the limits of data that is publicly available, there will be a natural slowing of AI power.

With a growing AI user base and increasing amounts of data available, people are starting to wonder what AI can do for their business models.

Katherine Meredith, Head of Data Science at Paragon Bank sees AI as the complete opposite of blockchain which was a solution looking for a problem; we now have problems that AI and machine learning can solve: “AI is being used in motor finance and asset finance to solve problems we tackle on a daily basis.”

Potential of AI

Artificial intelligence is causing anxiety amongst some workers who fear losing their jobs to AI technology. But in his book, Human + Machine, Paul Daugherty, Chief Technology and Innovation Officer at Accenture confirmed that won’t be the way in the future. AI machines will be there to complete mundane routine processes while humans will continue to do jobs that only humans can do. AI will be creating decisions that humans would then interact with and then it would be a collaboration, augmenting the roles not replacing them.

Likewise, Novuna Business Finance are not seeing the use of AI as a way of replacing humans, but to get AI to perform routine data-processing tasks (which can be done more efficiently with technology, giving a better customer experience) so that team members can be better utilised in the business to add extra value-added services where a personal touch is needed.

Graham Lines, Head of Innovation & Delivery at Novuna Business Finance confirmed, “AI is not about replacing humans and slashing costs; it’s about rethinking our business and our proposition to our customers with the help of technology.”

Following impressive results from a no-regrets proof-of-concept work, Lines could see the benefits at scale that AI could offer the business. Accordingly, Novuna established a dedicated team looking at AI and automation within the business, also encompassing data, to encourage the business to push forward with the transition.

By adopting a ‘test to prove’ approach, Novuna are building confidence from an investment point of view but also confidence from the business and users, which will then grow.

At Paragon, Meredith has put together a business case for each AI model and use: “If you get the problem right and define what the objective is, the business case does fall out the back end.”

Trimmer believes that a risk and reward approach needs to be adopted to explain the benefits of AI and prove the rewards in a way that people can understand and see, allowing businesses to take a “leap of faith”.

However, Goodson believes that people no longer feel threatened by AI: “The view that humans would perform the creative roles while machines will do the boring donkey work is outdated. We need to rethink things.”

A recent paper by Boston Consulting Group applied a golden pattern to AI capabilities in the banking sector whereby AI processes the information and evaluates it using traditional predictive AI capability, and then uses generative AI to produce a textual output to be interpreted by a human. The combination of these two capabilities could be particularly powerful and demonstrates AI’s ability to perform creative as well as processing roles.

Meredith agrees that we need to get away from the ‘humans or AI’ debate as there can be a combination of both together as a partnership, while Trimmer points to a triangle of people, process, and technology (AI) when it comes to problem solving: “While you can’t take away the people or the learning, AI takes us forward in a different direction and allows us to tackle age-old problems in a different way.”

Steve Taplin, Managing Director at Lendscape and moderator of the technology panel addressed a potentially interesting future use for AI for integrating interfaces to an IT landscape. Large-language models could be used to understand the context of various systems’ APIs and then those systems could talk together in a textual language but each using its own API approach to achieve that integration.

Value-driven opportunities for AI in the asset finance industry

In their analysis of the core banking sector, Boston Consulting Group looked at all the areas where there was meaningful introduction of AI into various processes in the value chain of core banking.

Looking at the research through an asset finance lens, the chart above highlights areas where AI can be implemented. The technology panel agreed that AI can be used whenever data is utilised in a business including:

Operations – a manual clunky process that is tricky to manage with many data sources – AI can be used to replace manual matching and inputting of data.
Underwriting – underwriting decisioning processes can be augmented through the use of AI.
Fraud – AI can be used to identify potential fraudulent activity, throughout the finance lifecycle.
Identity verification – AI can be used to validate and authenticate an individual’s identity.
Early warnings of financial distress – AI can pick up early warning signals of payment default.

Challenges of adopting AI in asset finance

Do we have enough data? While the use of AI in asset finance businesses would enable more efficiency, more business, and less room for human error, we need to ensure that there is enough good quality data in the industry to be able to produce reliable AI solutions.

Paragon’s Meredith believes that, as well as introducing data structures for capturing data (for example, at entry point and point of decision), the industry also needs to increase its coverage and find a way of getting the information about the customer through brokers and intermediaries.

An industry collaboration on data in an asset register would also present more opportunities in different areas.

Graham Lines notes that, “it is critical to make sure that the data you’re using for AI or any automation is as accurate as you can make it in the first place.”

People skills. The adoption of AI requires an inhouse team of AI and data science talent with specialist skills. But while this talent can drive a totally different insight into data and AI processes, they come at a high price.

The panel concluded the technology session with some words of wisdom for those embarking on the AI journey.

Graham Lines warned the asset finance industry to be cognizant of the risks, challenges and biases of AI technology.

Katherine Meredith advised asset finance businesses to find a pain point, define clearly what you want to achieve, and then see what AI machine learning can provide.

Andy Trimmer recommended simply giving companies and teams the ability to play with AI in a safe way and see the abilities that come from that: “Innovation stems from people doing the doing and if you give them more, then your business will fundamentally get more.” Steve Taplin agreed: “It’s time to play with this technology and figure out what it can do.”

Evolution AI’s Martin Goodson, who has spent many years working in the AI field, admitted that he has “never been so uncertain about the future, but has also never been so excited about what is possible.”

Find out if AI is changing the game for asset finance by reading the review of our Autumn Conference 2023 technology panel discussion

Analysis from Steve Taplin Managing Director at Lendscape

With access to machine learning technology accelerating rapidly, along with the mainstream popularity of generative AI brought about by ChatGPT, I think it’s fair to say that asset finance companies are now more open than ever to how these tools can benefit their businesses.

While there is a continual need for more education on understanding the benefits and challenges presented with AI and machine learning, it seems we are moving past the fear of humans being supplanted by machines. Increasingly, we are recognising the opportunities in augmenting human decision making, not replacing it.

Most are acknowledging that an investment in data science and machine learning talent is necessary to take advantage of this technology successfully and safely, but that this comes at a significant cost. Such costs may be beyond many of the smaller lenders.

In our “Four Layers of AI Maturity in Asset Finance” above, level 4 is where we apply machine learning techniques to fundamental asset finance processes. While it is clear that many are not yet ready to go to this level, there is evidence of some augmenting underwriting decisioning and starting to trial residual predictions.

In summary, the technology is here to stay and will continue to progress at pace and be increasingly accessible. It may be shown to have physical limits in due course, but for now we are at the beginning of exploring its potential within asset finance.

European automotive

UK asset finance

Introducing the new FLA Chair – John Phillipou

17 January 2024

Summary

John Phillipou became the new Finance & Leasing Association (FLA) Chair in Autumn 2023 following the resignation of Rebecca McNeil. He takes on the role at a troubled time when regulatory change is continuing to grow, and uncertainty over the economy continues to attract negative media attention. John’s challenge is to manage the impact of regulators and the Financial Ombudsman Service; to persuade the industry’s many publics of its value to SMEs and the wider economy, and arguably to find ways to engage with regulators which deliver better outcomes for both customers and the industry. John Phillipou talked to David Betteley, head of content at Asset Finance Connect (AFC) and a former chair of the FLA at the AFC conference in November.

John Phillipou started his career in financial services at Northwest Securities. After working in a sales capacity at JCB Finance and Citigroup, John moved to Deutsche Leasing as MD of UK and Ireland and then overseeing 23 countries, where he stayed for 12 years. John then spent two years as CEO at PEAC, moving to Paragon in 2019 as Managing Director of SME Lending. In 2023 John became Chair of the FLA.

In late 2022, John wrote about the 2023 outlook for the asset finance industry commenting: “With 2023 set to present SMEs with fresh challenges, our job is to provide them with stability…The refinancing of unincumbered assets and the financing of used equipment are two trends we expect to see in 2023, and this is understandable. Businesses will be making pragmatic decisions to support their balance sheets and provide themselves with the option of seeing how the year develops before committing to new investments. But it is never too soon to start researching what financial support is available and we will be pleased to discuss their requirements with them throughout the start of 2023.”

Despite unchanging risk appetite measures, 2023 saw a cautious stance from industry lenders and borrowers, brought on from an undercurrent of risk aversion (especially since Covid) and a lack of stability in the market, as a result of government changes and geopolitical conflict.

It was the duty of lenders to keep their feet firmly on the ground during the year, according to Phillipou, and to pass on a reassuring message to SMEs that they would sail through the storm as they had done during Covid. Moreover, Phillipou believes that the industry is “still crying out for that stability message from lenders as we go into 2024.”

Role of government

Jeremy Hunt’s 2023 Autumn Statement brought support and understanding to the asset finance sector from the current Conservative government. And while leasing was not included in the full expensing regime, the government has initiated a review showing a statement of intent which will hopefully have a positive outcome in 2024, with continued FLA lobbying.

In his new role as FLA Chair, Phillipou sees the government taking on a supportive role, listening and taking onboard what the FLA is saying. John Phillipou, along with the NACFB’s Norman Chambers, see that it is vital that the industry’s views are passed to the right people in government.

It is essential that the government recognises that, by lending to SMEs, the asset finance industry is helping to drive the UK economy forward by providing investments for positive business.

Under Phillipou’s leadership, the FLA will continue to lobby government and pass on the views of the asset finance industry, but he believes that it’s about getting the right industry representation to get those messages across; not just FLA board members but engagement from the whole industry because “the more people that plug in the message, the easier it will be”.

As an influential trade body, the FLA seeks representation in government discussions when looking at investment in the economy. Such talks should not simply focus on the ‘big four banks’, but rather look at investment opportunities from other financial sectors such as asset finance.

Media

There has been a lot of negative media reporting across the financial services industry and, as Chair of the FLA, John Phillipou is hoping to change this: “We need to get the asset finance industry out to the media on a front footing and need to promote the industry”.

It is essential for the industry to identify successful client stories in individual areas and regions and highlight these achievements to MPs in local constituencies. This would build a consensus of what the industry does at a local level and get the good stories out there, according to Phillipou.

The media like to paint the finance industry as too risk adverse which is creating negative press stories. The media generally look out for big banking features not small asset finance news stories. There is, therefore, a need for the FLA and its members to collectively get the success stories noticed and promote the industry, highlighting the industry’s relevant standards and codes and its capability for funding green assets.

Regulation

Over the past year new regulation has been imposed on the asset and motor finance sectors. With a particular focus on regulated business, many companies have been left wondering whether the new regulation will filter down to unregulated business.

For John Phillipou, a key word in the regulation debate is ‘proportionality’. Phillipou points to Paragon, where some business is regulated and some unregulated but “we have to look at what is proportionate to the regulated world”.

Phillipou believes that “by the time regulation impacts unregulated business, there will be a different view of the same regulation.”

While the government has encouraged the setting up of challenger banks to break though the legacy systems and bureaucracy of the more established banks, Phillipou commented that “we don’t want regulation to stifle the role of challenger banks and turn them into the old-school banks that they were created to get away from”.

“It is about adapting regulation to be appropriate to the businesses you are serving.”
John Phillipou

The added cost of compliance has also been causing significant challenges for small independent lenders, as highlighted in the recent Asset Finance Connect UK confidence survey, with some smaller businesses exiting the regulated field.

Like lenders, brokers are experiencing the same problems. Phillipou believes that it is about driving standards, with lenders having a duty of care to make sure brokers are effectively doing business with the customer. The last thing the industry needs is brokers seeing regulation as so onerous that they leave the market.

Brokers and lenders operating regionally on the ground is essential for the industry and something that the sector does not want to lose. It is all about standards, according to John Phillipou: “we’ve got to make sure that the industry functions correctly.”

To enhance the lender-broker relationship, it is fundamental that the NACFB and the FLA work together, giving a voice to both lenders and brokers.

Managing and sharing data

While managing and sharing data leads to better outcomes and enhanced security in the industry, it requires huge investment in technology and people. Again, many smaller lenders and brokers could be left behind due to the cost of systems.

The same applies for ESG reporting systems which can bring challenges for smaller lenders due to high costs and time needed.

Big banks can sign up to more granular green reporting modules, while smaller lenders will adopt a more streamlined version (averaging data). This presents a challenge for scope 3 reporting for non-bank lenders who can’t invest in the relevant technology.

Phillipou pointed out that the FLA is looking into this with a common set of definitions and standards that all lenders, no matter the size, can use when reporting.

Fraud

Since the Arena Television fraud revelations in 2021, the industry has been looking at ways to ‘fix’ the gap in UK asset finance fraud data with technological developments helping the fight against fraud.

However, many lenders report their data to just one agency which isn’t enough. There needs to be a crossover in the viewing of data and sharing it to a central source. Acquis Lumia is one such tool to aid lending decisions and help tackle fraud through industry collaboration and the sharing of data.

However, John points out that the data journey is not so straightforward. The FLA are keen to look at the data that lenders report to the FCA across their three divisions (asset, motor and consumer) as some of this data could be used by the FLA to model, for example, the green journey and see where it is going.

John Phillipou believes that the industry needs to keep evolving its processes to avoid fraud.

The role for asset finance in the coming year

A valid point was raised during the session that despite years of lobbying by the FLA, the Treasury, HMRC and Whitehall do not fully understand the importance of asset finance or its delivery channels, the tax regime doesn’t encourage it, the regulator hinders it, and non-bank lenders are largely ignored.

Under his leadership at the FLA, it is clear that Phillipou wants to drive the asset finance agenda forward with increased communication with FLA members, so they can follow the association on its journey.

Pushing into regions with levelling up, non-bank lenders can reach parts of the UK that other lenders cannot; a message that the FLA needs to reinforce with UK PLC to show that asset finance is a vehicle to influence government economic policies.

However, small non-bank lenders are currently facing a number of disadvantages:

Cost of funds is, on average, higher than for mainstream banks
Cost of regulation
Development of new products
Basel III and increased costs

Bank lenders need to bridge smaller, regional lenders, alongside British Business Bank schemes and additional help from government. It is of paramount importance to get the message across to government to get the liquidity through to non-bank SME lenders.

Again, Phillipou focuses on ‘proportionality’: we must apply (FCA) regulation which drives standards in a way that is appropriate to the markets we are serving, that are fundamentally different to consumer markets, rather than lessening regulation depending on the market which can be dangerous.

Over the coming months, the industry needs to address:

easier access to wholesale funding
different capital requirement options
helping challenger banks and small non-bank lenders to fund the green revolution
uncertainties of risk
creation of new models and products

Phillipou believes that uncertainty in the industry is fuelling some less than positive behaviours. For example, while everyone is talking about the green transition, no one is doing anything about it due to uncertainties of risk related to residual values and an under-developed second life market.

Rather than focusing on negative perceptions of the sector, the asset finance industry needs to be proud of itself as an important part of the UK economy, according to Phillipou, and should stop apologising for its existence!

“The asset finance industry must be proud of itself as an important part of the UK economy.”
John Phillipou

Concluding remarks

The new Chair of the FLA, John Phillipou, sees challenges facing the asset finance industry in 2024, but as a long-term member of the asset finance community he sees a stable industry that should be proud of its achievements and the role it plays in funding SMEs who are the lifeblood of the UK economy.

To address any issues, John believes that it is paramount that all industry players – whether from trade bodies, lenders or brokers – must unite to present a forward-footed, stable financial sector and a united voice to lobby on issues affecting the sector.

Find out John Phillipou's thoughts on the future of the asset finance industry by reading our review of the Asset Finance Connect Autumn Conference 2023 interview

Analysis from David Betteley Asset Finance Connect's head of content

It was a real privilege to interview John Phillipou at the AFC Autumn 2023 conference.

It was great to hear that John wants to be a listener in his new role and hear the views of both large and small operators in the industry whether they are lenders, brokers, intermediaries and whether they are FLA members or not. This engaging approach will serve him well and will enable him to ensure that the FLA going forward is truly representative of the whole market and not just the large banks and captives that are members of the Finance and Leasing Association.

It was refreshing to hear that John wants the FLA to work with other trade bodies in the sector. However, this is sometimes not straightforward – especially where there is a difference in approach (for example, regarding commission disclosure and, more recently, in dividing up the responsibilities between associations as they seek to find the right way to manage and develop the, sometimes, abrasive interaction between lenders and brokers).

John was clear during the interview to make the point that he is a no-nonsense common-sense businessman, and in this respect he has already both identified and understood the challenges that the industry faces.

I know from both the answers given in the interview and from the planning discussions we had before the conference that John has already developed plans for addressing the critical issues that the industry faces: regulatory creep, customer experience, the role of data, AI and ML, and of course the pressure on margins generally.

He also is clearly considering how to find a way to better manage regulators and other more independent quasi-governmental bodies like Financial Ombudsman Service (FOS) (who have more independence than the FCA); and for increased use of the media to win hearts and minds of the industry’s publics. These issues are remarkably topical given the battle between Post Office and postmasters. The industry of course lacks the appeal of postmasters, but the industry certainly has a compelling case to make about the value it delivers to the UK economy.

I believe that I join everyone who reads this in wishing John well in his new role as Chair of the FLA. I’m sure that he won’t mind me saying that he would love to hear from you if you would like to bring any industry related matter to his attention!

UK asset finance

Technology to enhance the broker-lender channel

7 June 2023

Summary

Technology is an enabler for the broker-lender channel, delivering business efficiency and simplified compliance, leading to better customer outcomes.

The recent Asset Finance Connect asset finance unconference brought together lenders, brokers and technology providers to discuss how technology can enhance the broker-lender channel.

Today’s UK asset finance brokers and lenders interact using a variety of competing solutions.

The technology sessions in the conference considered whether one technology platform used by all participants would create greater efficiency and a better experience for customers than multiple competitive platforms.

The scaling ecosystem business model

Participants in a scaling ecosystem are competitors who collaborate in ways that deliver benefit for all. This collaboration enables all parties to efficiently scale. Members of a scaling ecosystem may establish a collectively funded and owned entity to orchestrate the activities of all participants.

In the Netherlands, three competitor banks established HDN, a commonly owned organisation which enables interactions between brokers and lenders in the residential mortgage market. The collaboration lies in agreeing a format for the transition of data which moves through digital pipes owned by the organisation.

In the UK, if asset finance lenders and brokers were to establish a similar organisation and to agree a format for information exchange then this would create efficiencies for both brokers and lenders. For example, a lender seeking to create a single technology system to manage incoming proposals from multiple lenders could depend on receiving information in a single agreed format rather than having to cater for different formats. Similarly, a broker seeking to send proposals to multiple lenders could depend on sending information in a single agreed format rather than having to alter the proposal to meet individual lenders’ different requirements.

Against these efficiencies, some ecosystem participants might fear that they will lose the competitive advantage that lies in differences between them and other participants.

Case study: HDN

HDN ensures smart and secure information exchange in residential mortgages. A Dutch company owned by three of the largest banks, HDN creates the technology pipes and messaging standards connecting lenders and brokers. All mortgage transactions in the Netherlands go through HDN.

The HDN co-operative association includes 60 members representing almost all major providers of mortgage and mortgage-related products – financial advisors as well as franchise chains, service organisations and IT suppliers. HDN provides secure and smart information exchange in financial services with standardised, fast and efficient processes via a state-of-the-art secure and compliant platform.

Reinier van der Heijden, Director at HDN said, “There are great opportunities to use standardisation to serve customers even better. It helps customers to create a reliable and predictable process.”

HDN facilitates the application, underwriting and management process of mortgage and mortgage-related products. They do this, among other things, by developing and managing the standard for secure digital communication in the financial chain. This HDN language is created through interaction and co-creation with members and users. As a result, the HDN stakeholders save considerably on their operating costs, their processes are efficient, and their customers quickly know where they stand. To guarantee the quality and unambiguity of the standard, the members and users are certified annually.

The members of HDN make an annual financial contribution and participate in HDN’s working groups to ensure that all members have a say in what happens at HDN.

For more information, visit HDN’s website: https://hdn.nl/

The challenge of collaborating between participants in the lender-broker market

The UK asset finance industry is a larger more fragmented market than the Dutch mortgage industry. With more participants it is likely to be difficult to reach an agreement between lenders and brokers to establish a commonly agreed format without a trigger which makes it difficult to continue without an agreement to collaborate.

The industry sets a relatively high bar for collaboration.

The industry is currently negotiating an agreement to establish a commonly agreed basic audit for brokers (called a review) which lenders can rely on wholly or in part to replace their own checks. This would leave the broker more time to focus on generating business for lenders.

One trigger for establishing a common review process is arguably the increased focus generally on long complex distribution chains which has occurred because of the introduction of the Consumer Duty for regulated transactions. A common review has already been agreed for motor dealers, for example, which ensures that dealers are compliant with Consumer Duty requirements. A common review process for brokers dealing with non-regulated transactions is an obvious next step.

Attempts to agree a common review process for asset finance brokers have been largely successful, however the trade bodies FLA and NACFB have not agreed a single organisation to orchestrate the process – and it is possible that the industry will have two potentially conflicting sets of reviews, one run by the FLA and another by the NACFB. It is unclear whether the benefit of having two competing processes will outweigh the inefficiencies of having two organisations carrying out largely the same activities on behalf of brokers and lenders.

Another opportunity for collaboration has been more successful. Acquis Data Solutions have established an exposure register, a single shared resource which records leasing transactions by lessee. The collaboration required by industry participants was to share a sufficiently high percentage of all industry transactions that it would successfully identify individual lessees with whom the industry has a high exposure.

This project was triggered by a large fraud in which a single lessee financed an asset with multiple lenders. It was suggested that the size and frequency of frauds might be increasing. In this instance Acquis managed to establish a consensus among lenders to support the collaboration, even gaining participation from a large lender organisation who said they would not necessarily use the service.

It is possible that efficiencies alone might not be compelling enough to encourage collaboration. A large technology player, with the potential to act as a competitor to all lenders (Amazon, for example), might provide a trigger if they established a platform for brokers to submit proposals to them. An established infrastructure owned by the industry would create a barrier to entry for such a competitor.

The unconference considered FXE Technologies SmartFinance Hub to identify potential benefits of a common platform.

Case study: FXE Technologies (FXET)

FXET is a specialist provider of intelligent digital solutions for the business funding market that makes it easier for the ecosystem to compliantly transact.

For the Broker-Funder channel, FXET’s SmartFinance Hub enables efficient, compliant processes and freeing up time spent on admin to invest in building client relationships:

· Single point of access for brokers to screen proposals in minutes: Single point of access to panel of funders to match proposals to appetite without a hard credit search
· Digital packaging of proposals to drive high quality, consistent submissions with minimal admin effort: Use of background data and a single proposal path reduces admin time and increases look-to-book ratios
· Evidence of compliant processes and adherence of industry’s code of conduct: Audit trail to evidence compliant processes from capture of customer needs to confirming relevant consents makes adherence to compliance part of the management of each individual proposal – and easily evidenced

At the centre of the platform is FXET’s a digital proposal management process that ensures compliant processes are followed by a triage engine instantly assesses proposal against appetite across a funder panel. Funders can use more than 300 characteristics to pre-qualify proposals – providing brokers with an instant indication of the appetite across their panel.

Brokers are fully in control of progressing with any of the funders on their panel – creating a high-quality proposal and using the initial appetite assessment to have the right dialog with funders.

For the funder, the solution transforms their front-end and underwriting processes by doubling their underwriting capacity as proposals that are not in appetite are quickly screened out, preparing an initial set of assessments for the underwriter, driving higher conversion rates, and helping the funder internally to bridge the gap between an enquiry, decisioning and underwriting. This translates into faster decision making – and less wasted time.

Unlike decisioning platforms, SmartFinance Hub puts both brokers and underwriters at the centre of the decision-making for deals: recognising the nuanced decisions that are often required in the Asset Finance space, the platform creates instant visibility on ‘fit’ to brokers and funders but leaves decisions in the hands of experienced professionals.

For technology platforms to be effective and successful in facilitating interactions between funders and brokers, FXET believes that trust as well as demonstrated value-add is central. By working collaboratively with all industry players to solve key pain points, FXET recognises that transformation can be slow moving – as change without advocacy from all involved stakeholders is likely to fail.

Operating in the complex commercial funding ecosystem for more eight years, FXET has always put the human interaction at the centre and seen digital technology as a supporting system that can reduce the administrative workload and address compliance challenges, freeing up humans to deal with personal interaction.

Benefits of technology platforms

Many large funders are adopting digital systems to facilitate faster, more effective engagement with clients. In some cases, these solutions have cost millions of pounds. Funders view their proprietary digital platforms as a differentiator. The platforms embed the funder’s take on compliance and governance processes, as well as value-adds they want to provide to brokers.

A drawback of multiple lender-specific platforms is that brokers have to engage separately with each and to deal with the funder’s unique take on how proposals should be submitted.

The benefits for brokers of a solution that gives them a single point of access to all the lenders on their funding panel are clear. It reduces the need to enter a proposal into each lenders’ platform, giving them time to focus on the human interactive side of the business – engaging with customers and funders to structure the right deals. It also makes it easier for a broker to add new lenders onto their lending panels.

The benefit to large lenders who already have their own lending platform is less clear. One difference lies in potential value-adds extracted from data derived from other lenders as well as their own data which may provide valuable insight into an individual broker or an individual customer.

For example, a broker who submits the same proposal to many lenders (known as multi-propping) could be more quickly identified and treated differently. A lessee making multiple applications for an individual asset would also be more likely to be identified.

Perhaps the largest advantage to lenders of shared infrastructure is shared investment, and less duplication of work. The more lenders pool resources to invest in infrastructure, the more infrastructure they are likely to be able to afford.

This advantage is particularly compelling for smaller lenders who may not be able to afford their own solutions; and who would be more likely to conform to a common agreed proposal format than larger players.

But as expectations about what problems technology should be able to solve increase, the case for shared investment even among larger lenders may become stronger. One area where technology is expected to play a far greater role is around compliance.

Compliance

Compliance remains a major concern for the asset finance broker-lender channel, specifically as the FCA makes it clear that obligations like Consumer Duty will in due course also apply to the unregulated market.

There is already a blurring of the boundaries between regulated and unregulated business, with most funders having the same processes in place for regulated and unregulated deals.

The review of the Consumer Credit Act 1974 is expected to bring clarity and greater harmonisation of rules followed by unregulated and regulated business.

As the industry develops an understanding over what are the right controls, it can reduce the cost of these controls by making them part of commonly agreed background processes that ensure that compliant processes are adhered to.

Technology can allow a business to build-in processes that can ensure that compliance issues, like GDPR, and Consumer Duty, are addressed and demonstrated. Simon Goldie, director of advocacy at the FLA has suggested that technology could be used to embed many of the core elements of broker reviews into real time transaction checks.

The core DNA of a technology build is the ability to demonstrate good outcomes for customers and to track and show that good customer outcomes have been achieved. Automating and systemising data and evidence would assist brokers by bringing to the forefront those assessments that brokers must evidence, for example, eligibility and affordability.

While a technology platform can contribute to addressing key challenges in the asset finance broker-lender channel and delivery efficiencies, it should not be seen as a ‘quick fix’ to every industry-wide challenge between brokers and funders, for example, technology need not be the solution to commission disclosure.

Concluding remarks

The adoption of a co-operative technology platform similar to the HDN mortgage platform in the Netherlands provides a potential opportunity to establish an efficient ecosystem which embeds a range of value-adds which can significantly improve the broker-lender channel and discourage activities like multi-propping.

The business case for using a single platform is currently strongest among the smaller lenders who are less likely to be able to afford their own systems, and who will benefit most from shared infrastructure and sharing data. For now, the benefits of efficiency currently seem unlikely to offer a compelling enough case for larger lenders to drop their proprietary platforms which provide them with a competitive advantage.

Technology is increasingly being seen as a tool to manage compliance across the distribution chain. In future the broker-lender channel seems likely to embed real-time compliance into digital processes to ensure the sector delivers the right outcomes for all stakeholders.

Managing compliance may change the status quo, driving development of industry rather than lender-specific infrastructure. Industry platforms enable an industry to orchestrate ecosystem participants more effectively particularly where adherence to a common process is more about achieving compliance than efficiency.

The role of trade associations in establishing industry-wide solutions will be key.

Find out how technology can enhance the broker-lender channel by reading the review of our Asset Finance Connect Unconference

UK asset finance

Building a resilient and efficient broker-lender channel

7 June 2023

Summary

The asset finance industry is currently negotiating an agreement to establish a commonly agreed basic audit (review) for brokers which lenders can rely on wholly or in part to replace their own checks. This would leave the broker more time to focus on generating business for lenders.

One trigger for establishing a common review process is arguably the increased focus on long complex distribution chains which has occurred because of the introduction of the Consumer Duty for regulated transactions. A common review has already been agreed for motor dealers, for example, which ensures that dealers are compliant with Consumer Duty requirements. A common review process for brokers dealing with non-regulated transactions is an obvious next step.

Attempts to agree a common review process for asset finance brokers have been largely successful, however the trade bodies – Finance & Leasing Association (FLA) and National Association of Commercial Finance Brokers (NACFB) – have not agreed a single organisation to orchestrate the process.

It is possible that the industry will have two potentially conflicting sets of reviews, one run by the FLA and another by the NACFB. It is unclear whether the benefit of having two competing processes will outweigh the inefficiencies of having two organisations carrying out largely the same activities on behalf of brokers and lenders.

The recent Asset Finance Connect asset finance unconference brought together all relevant parties – brokers, lenders and trade associations – to discuss this ‘common focus’ in an open and transparent session.

Align a common purpose

There is a commonality of interest across the industry and a will to find a practical solution across all funders, brokers and trade associations for consistency, efficiency, and managing regulation and oversight.

Monitoring and oversight of these third-party relationships is a key requirement for any lender to ensure it proactively identifies and minimises risks, and demonstrates effective controls are in place. Effective oversight also has commercial benefits from the appropriate management of risk and the engendering of trust with partners and customers.

Lenders understand that standardisation and consistency in execution of the review process is needed with funders and brokers collectively agreeing the way forward.

For brokers, the time and administrative workload is increasing as the large range of funders each require slightly different levels of information and form filling. A lot of it is common information across different funders and therefore streamlining and standardising the information across the industry is a sensible move.

“It is important that we get it right,” according to the FLA and NACFB, who both recognise the significance of providing assurance for lenders and collaborating with one another for the benefit of asset finance brokers and lenders.

Both the NACFB and the FLA have developed broker oversight review processes that are aligned with Consumer Duty. There is close alignment between the NACFB and FLA review documents providing consistency and standardisation.

The FLA has also produced a ‘best practice’ for members which acknowledges the NACFB standards and shows a level of recognition and co-operation.

Along with the collaboration of the industry, the adoption of a single digital platform provides a potential opportunity to manage compliance across the distribution chain as well as standardising the lender-broker audit review. Technology would enable the review process to be a year-round activity and not just an annual review process.

Who will undertake the process?

While there is a close alignment between the NACFB’s and FLA’s review process – with 95% consistency – the more challenging issue is deciding which single organisation will undertake the review’s orchestration process – FLA, NACFB or an independent third party.

The NACFB has helped with the growth of brokers and, accordingly, brokers join the association on the back of regulation for assistance, support and advice. As an inclusive association, the NACFB have been working for 10 years on the review process and they recognise the challenges and see that consistency is needed through a kite-marked broker process. The association feels that their kite-marked assurance status provides sufficient auditing evidence for brokers.

However, the FLA and its members favour outsourcing the orchestration and auditing process to an independent third-party entity to either conduct the audit review process or, alternatively, audit the NACFB-assured kitemark process.

Lenders would also want transparency of data behind the kitemark, which would provide a starting point for lenders who need to complete due diligence. Many lenders’ compliance departments will still check the audit results to ensure that they comply with FCA regulations.

Lenders want an independent review process with collective transparency. They want the same single view of the broker – “a single version of the truth” – not an adapted review depending on which lender it is for, with full accountability and backing from the whole market. All lenders will need to be onboard with what works best for them, otherwise they will not use the review process.

From the unconference session and accompanying poll, it was generally felt that lenders favour the FLA or an independent body to complete the audit review process while brokers have no preference – they just want a common standardised review process to help ease their increasing oversight workload.

Issues to resolve

When assessing the work completed to date, it was felt that more questions need to be asked and more needs to be done before a common review is reached, including: what information is needed, how much detail do you need, how do you collect the data, how do you record it and report it, and who is going to pay for it?

With regards to remuneration costs for the process, the unconference poll found that lenders believe brokers should foot the bill, while brokers do not want to fund the process.

Many participants also feel that it would be good to standardise trading agreements and get rid of onerous clauses. However, at the current time the FLA has not seen an appetite from members to standardise other documentation.

The FLA highlighted possible issues with total industry collaboration citing asset finance brokers who are not members of any trade association or businesses who are happy to use their own systems and do not need or want an overseeing body.

Concluding remarks

There is a combined spirit and will within the asset finance industry to find a way forward to align broker oversight documents and processes, creating an efficient and standardised audit review.

The asset finance industry must keep communications open and continue to work together to streamline the audit review process and find a single entity to orchestrate the whole process rather than having two competing reviews running side by side.

One unconference participant concluded: “If we don’t look at regulation and standardisation ourselves in a coherent manner, then we will have unwanted regulation enforced on us.”

Find out how the asset finance industry is trying to find a way to create an efficient and standardised audit review by reading the review of our Asset Finance Connect Unconference

UK asset finance

Managing the broker-funder relationship

2 May 2023

Summary

In the 1990s, banks and leasing companies were generally somewhat reluctant to deal with brokers. Times have changed quite dramatically, with banks and non-bank lenders happily dealing with communities of brokers, with many funders set up specifically to deal with brokers as their primary source of new business.

The panel at the 2022 AFC Winter Conference included a mix of brokers and funders who came together to discuss some of the challenges facing the broker-funder relationship.

Continual changes in the financial services landscape are causing issues for both brokers and funders; these include changing customer needs, expectations and demographics; regulation and compliance; and emerging technologies.

Digitalization

The Covid pandemic tended to push digitalization to the top of the agenda for companies around the world, with the financial services industry accelerating its adoption and development of digital channels and technologies.

However, the more digital things become, the greater the possible threat to brokers. There is an underlying concern that brokers might not be needed in the future as AI could potentially takeover key operations on all platforms.

With the transition to the digital world, brokers can themselves use tech to enhance the customer journey and manage the customer better, with dealer portals giving some power back to the brokers.

“There is a strategic way of using technology to complement the traditional methods of acquiring customers and building relationships,” according to Lee Schofield, Director of PMD Business Finance.

For brokers, the technology focus must start at the point of new customer acquisition.

According to Schofield, customers are wanting answers faster, coupled with digital ease of use. So, technology needs to be harnessed in the broker-customer relationship and have a particular role to play through the use of APIs.

However, with lower value asset finance deals, customers can still use online portals and digital platforms to go direct to the lender, therefore bypassing the broker.

Tom Perkins, Director & Co-Founder at Charles & Dean, believes that “brokers are having to evolve to have multiple business models within their own businesses.” According to Perkins, brokers are having to leverage different technology and systems for different asset finance applications. There has even been a surge in brokerages creating their own bespoke IT systems in order to make their business more competitive and also more efficient.

Along with the pandemic, came a shift to hybrid working and changing customer behaviours, resulting in much more online interaction as opposed to face-to-face client relationships.

It is inevitable that things will become more digital, according to Lee Brenard, Managing Director at Asset Funder, as it improves efficiency. But Brenard also sees a need to keep the ‘old’ values of face-to-face business, particularly as one way of reducing fraud.

Mike Randall, CEO of Simply finds the asset finance industry to be at a crossroads. While digitalization is helping to standardize the system, regulation is not making things any easier for brokers and funders.

Many panelists believe that regulation is actually stalling technological progress in the asset finance sector as compared to the consumer world.

Regulation

With the introduction of the new Consumer Duty, regulators are continuing their drive for best practice and good customer experiences, together with a focus on price and value. However, the expected reform of the Consumer Credit Act and the prospect of yet more change has left many in the sector wondering how their already stretched teams will be able to respond.

Nova Everidge, Director of Asset Finance at Metro Bank sees regulation as the biggest issue affecting the industry, making things ever more complicated, especially the lender’s relationship with their broker community.

While regulation is having a notable impact on the end-user customer outcomes and is helping to reduce risk and fraud in the financial services sector, the broker community can see a potential reduction in business as more oversight progresses with the introduction of more regulation.

With brokers dealing with many lenders on their funding panel, all of whom interpret the regulations slightly differently and have different requirements, Everidge believes that funders, “need to find a better way of working with brokers in what has become a complex marketplace.”

In the funder-broker model, Nathan Mollett, Head of Asset Finance at United Trust Bank feels that any issues are about oversight and the methods that funders use to ensure brokers are in fact delivering fair outcomes to customers.

All lenders perform their broker oversight slightly differently depending on their interpretation of the regulation, leaving brokers having to go through a detailed oversight audit process numerous times in accordance with the number of funders they have on their panel.

Smaller brokers can therefore end up spending more time dealing with funders, broker oversights and audits than they do actually serving their SME customers.

According to Mollett, standardization and consistency in execution is needed with funders and brokers collectively agreeing the way forward.

Collaboration

Key to a really effective relationship between funders and brokers is the need for consistency, oversight and collaboration between the various parties.

Funders and brokers need to collectively agree on how such a collaboration will work, possibly in a forum where all voices are heard enabling both brokers and funders to have viable businesses going forward.

The Finance & Leasing Association (FLA) and the National Association of Commercial Finance Brokers (NACFB), trade associations representing funders and brokers respectively, both need to work harder to reach an efficient solution for funders and brokers, according to the FLA’s Simon Goldie and the NACFB’s Norman Chambers.

While the FLA brings the funders’ perspective and the NACFB brings a broker view, they both also need to understand the other side of the equation. Goldie commented that, “collaboration and an open dialogue with brokers is key, together with understanding the issues from all sides.”

An efficient digital solution for broker oversight is also a necessity in managing the broker-funder relationship. While the NACFB and the FLA both have their own systems, they must work together for consistency so that brokers can serve customers rather than deal solely with oversight for funders.

“Standardization is important” from a reporting perspective, according to UTB’s Mollett, and is an issue which should be relatively easy to fix.

Many of the panelists, including Paragon Bank’s John Phillipou, agree that collaboration and standardization is very important and will help the relationships between brokers and funders, but agrees that the competitive edge must not be lost in the process.

Randall commented that “the pie is big enough for all of us,” and would therefore not want to see absolutely everything standardized, as some elements could risk the competitive element of relationships.

In Randall’s view, there is currently still quite a gap between brokers’ and lenders’ drivers and expectations, and the industry needs to collaborate to reduce this gap before there are long-term consequences for both lenders and brokers.

Find out about the challenges facing brokers and funders by reading our summary of December's Asset Finance Connect Conference Session

Analysis from Stephen Bassett head of the Asset Finance Connect UK asset finance community

The panel discussion in this session gave a very useful insight into the natural frictions which exist between those who originate new business and those who have to underwrite and manage such transactions during their lifecycle, whilst also ensuring that best practices are applied throughout.

The AFC conference session also highlighted the difficulties which arise from ever-changing and developing technologies and regulatory requirements together with where and how such new methodologies could best be deployed in the overall value chain without everyone duplicating additional costs.

UK asset finance

How to raise funds for a finance portfolio

2 May 2023

Summary

At the AFC Winter Conference we took an initial look at funding options for new and established companies wanting to start or scale up their own portfolio of finance agreements.

Stephen Bassett was joined on the AFC panel by a selection of experts from the funding market, each occupying a somewhat different position in the value chain, so that they could help highlight some of the many different funding approaches and financing options available. Moderator Stephen Bassett opened the discussion by noting that there were more ways to do this than many realized.

Warren Mutch, Head of Speciality Finance at Shawbrook Bank confirmed, “there is a range of different institutions and different sources of funding available. Some will work for you, others may not work as well.”

Sandeep Kaundal, Debt Advisory Lead at T.Mistry & Associates Limited pointed out that “lending to the lenders” is itself a form of speciality finance.

“Providing funds to lenders is actually a multi-faceted market.”

A brief overview follows, of just some of the speciality finance options discussed at the Conference:

Wholesale and block discounting. Block discounting is seen by many as the first concrete step in the own book funding journey. Block discounting allows independent finance providers and lenders to release the capital they have tied up in existing agreements once they have been originated.

It is a relatively simple and secure revolving credit facility allowing lenders and providers to raise funds against their future rental income streams and then immediately reinvest in their company’s growth by providing additional finance agreements to new customers.

Warren Mutch heads up the wholesale and block discounting team at Shawbrook Bank, whose block discounting facilities enable companies to do exactly this, releasing capital from current live contracts without impacting on the agreements arranged with their own clients.

Invoice discounting. Amongst other facilities, invoice discounting is offered by Leumi ABL as a core part of their asset-based lending product range. Like block discounting, invoice discounting improves a company’s cashflow, with immediate cash availability linked to outstanding sales invoices, so the available funding grows as the business grows.

Medium-term note programme (MTN). Working on the capital markets side of the LGB business, panelist Fergus Rendall, Associate Director at LGB Capital Markets described how they arrange debt facilities styled medium-term note (MTN) programmes which can provide a more flexible type of funding, offering investors greater diversity and higher levels of security.

Fergus was joined by LGB’s founder and director, Andrew Boyle, and they gave a clear and concise explanation of these MTN programmes which enable lenders and providers to borrow from multiple investors quickly and efficiently, the funds from which might be utilized in order to fund growth, refinancing, acquisitions, wholesale requirements, or just working capital.

Boyle concluded that, “LGB’s medium-term notes are perfect for companies who want to borrow incremental amounts, and for investors who want to have a regular source of notes at par that provide them with income. LGB have often been able to successfully put these two parties together.”

British Business Bank – ENABLE programmes. To support lenders such as smaller banks and non-bank financial institutions and unlock more lending to smaller businesses, the British Business Bank (BBB) launched the ENABLE Guarantee and the ENABLE Funding programmes.

Designed to encourage additional lending to smaller businesses, the ENABLE Guarantee programme incentivises participating institutions by providing a government-backed portfolio guarantee, to cover a portion of a designated lending portfolio’s net credit losses in excess of an agreed ‘first loss’ threshold, which they receive in exchange for a fee.

In November 2014, the BBB launched a new programme, ENABLE Funding, aimed at improving the provision of asset and lease finance to smaller UK businesses.

Providers of finance to smaller businesses often lack the scale required to access capital markets – a key source of funding for lending institutions – in a cost-efficient manner.

ENABLE Funding warehouses newly-originated finance receivables from different originators – bringing them together into a new structure. Once the structure has sufficient scale, it will refinance a portion of its funding on the capital markets. This means the British Business Bank can help small finance providers to tap institutional investors’ funds.

According to Shire Leasing’s CEO Mark Picken, the ENABLE Funding programme is like the “big brother of the BBB’s match funding facility,” and allows businesses like Shire Leasing to become engaged in securitization transactions.

Case study: Shire Leasing’s funding journey

Since its inception in 1990, as a non-bank lender, Shire Leasing has needed to create cash flow to fund agreements and growth. At the time, block discounting was limited with a “glass ceiling” of around £10m. Picken notes that, “If you were a cynic, you might say that block discounting is designed to keep the small man small, because you can only borrow just enough to make your way reasonably easy.”

After the credit crunch, the government-owned British Business Bank (BBB) was formed to look at many markets including block discounting. “The BBB’s plan was to try to smooth the way for people to get access to block discounting type facilities without the £10m limit,” according to Picken.

The BBB set up a match funding facility which changed the £10m ceiling of block discounting. Shire Leasing entered the match funding facility and received investment from the BBB’s commercial arm – British Business Bank Investments Ltd – in late 2014, matching Shire Leasing’s private funders and investing an additional £40 million block line funding into Shire Leasing.

The BBB then launched another product called ENABLE, allowing businesses like Shire Leasing to get into the realms of being able to securitize. Shire Leasing joined the ENABLE funding programme enabling the business to access wholesale funds at a reasonable price as well as diversifying their funder base.

In 2017, the BBB agreed a £37.4m ENABLE Funding Facility with Shire Leasing to boost asset finance for smaller businesses. (See https://www.shireleasing.co.uk/british-business-bank-agrees-new-37.4m-enable-funding-facility/). In 2020, the BBB agreed a further £62.4m ENABLE Funding Facility.

In 2022, Shire Leasing further strengthened their funding position with a £15 million secured medium-term note (MTN) arrangement with LGB Capital Markets. The programme will provide funding and enable further investment in Shire’s business platforms, operations, own book, and other opportunities as they arise. (See https://www.shireleasing.co.uk/lgb-capital-markets-advises-shire-leasing-on-15-million-mtn-programme/)

Shire Leasing is always on the look-out for its next funding facility, according to Picken: “If you wish to grow, you always need to look for the next appropriate type of facility.”

Along their funding journey, Shire Leasing has been happy with all its chosen funding sources with good relationships created along the way. Mark Picken highlights that, “the only way you can borrow money on any scale from someone who wants to lend it is to be transparent to encourage trust.”

Case study: LGB Capital Markets

LGB Capital Markets is a capital markets and investment firm providing two services: (i) capital raising for corporates; and (ii) offering investment opportunities to investors.

LGB Capital Markets provides capital raising advice and structures medium-term debt financing programmes to support the growth of their corporate clients.

LGB looks at the whole ecosystem from early-stage to large institutions: “Early-stage businesses approach LGB looking for senior, more developed funders come to us looking for more flexible facilities, potentially mezzanine capital, and even large institutions come to us looking for more working capital type facilities or mezzanine type facilities, potentially for things like acquisitions.”

One of LGB’s products is the medium-term note (MTN) programme which is more flexible than block discounting. A £15 million secured MTN programme was arranged for Shire Leasing in 2022, with the programme providing funding to Shire’s senior wholesale funders to enable the company to further invest in its business platforms, operations, own book, and other opportunities as they arise.

Shire Leasing’s Mark Picken was particularly impressed with LGB as the capital could be used for different options (with LGB’s approval), for example writing agreements, cash flow and acquisitions, unlike most other funding products which are restricted to simply writing agreements.

Advice for somebody looking to scale up or start their finance portfolio

From their different perspectives around the funding path, the panelists ended the conference session by offering their advice to anybody looking to scale up or start their own finance portfolio. The main thrust of this, according to all the panelists, was that to establish a strong and effective relationship with a lender, there must be complete transparency in order to ensure that there is mutual trust between parties.

Shawbrook Bank’s Mutch added that, from a risk perspective, he would much rather be supporting a customer already known to the bank, who has been onboarded and is performing well under a recognized growth strategy.

Other points raised included:

Stick to the basics and be transparent.
Get to understand the different funding processes and products that are available.
All your internal policies, procedures and systems all need to be set up, published and ready to go before further investment can be expected.
Make sure you have the right set of skills within your organization in order to manage the funding journey you’re about to embark on.
Know exactly where you are and what you want to achieve, create a thorough business and financial plan for growth.
If you are unsure, go to a consultant or advisor for further advice and clarification.

T.Mistry & Associates’ Kaundal reinforced that, “the funders need to be more convinced in every way possible that they can trust you and they can grow with you.”

Whether advising the borrower or the lender, Kaundal believes that a consultant can make the process simple and unlock the best liquidity option for their client, helping them to answer three important questions: (i) how can I grow my business? (ii) how can I make sure I’m getting the best deal? and (iii) how can I protect my business and align it for future recovery?

Find out about funding options for new and established companies wanting to start or scale up their own portfolio of finance agreements by reading our summary of December's Asset Finance Connect Conference Session

Conclusion from Stephen Bassett head of the Asset Finance Connect UK asset finance community

Whilst many experienced players in the lending market already know what they need to do about all these matters, many others, especially those just starting out on the lending journey, do recognize that there is a great deal to learn and that accessing funds at workable rates is not necessarily all that easy. It seems that more detailed sessions along these lines may well be helpful.

UK asset finance

Propel – Championing the SME

20 December 2022

Summary

Propel Finance has enjoyed soaring growth of 92% over the last year. What is driving this growth as the economy faces headwinds that could challenge the asset finance industry once more?

As an independent asset finance specialist lender, Propel has seen a rapid rise in delivering asset finance to SMEs; reflecting both the investment in its staff, its technology and its desire to work with its partners – whether financial or manufacturer – to provide SMEs with vital access to finance.

Propel’s most recent partnership with Samsung Capital highlights Propel’s capabilities as an SME specialist. Samsung, like Barclays, introduce their SME customers to Propel in an accretive ecosystem business model, based on their confidence in Propel’s technology platform and customer service

In a recent interview with Jon Maycock, Commercial Director of Propel, Asset Finance Connect discussed the main drivers of growth with Jon – robust funding, distribution partnerships and efficient customer centric systems.

Samsung Capital

In their strategic partnership with Propel, Samsung Capital are introducing their business customers to a specialist which is a mutually beneficial way of helping SMEs. Propel are particularly effective in performing this specialist role. The appetite for partners such as banks, brokers and technology providers to use this niche service seems clear, with the new collaboration with Samsung reinforcing its success. Customers are evidently appreciating this new way of connecting their business needs with a niche provider based on Propel’s customer satisfaction scores.

This accretive ecosystem business model works particularly well because Propel have invested in excess of £4m in its proprietary platform, Propeller, to deliver a seamless end-to-end process for the customer journey. Propel have deployed their technology to their chosen distribution partners to enable Barclays, their broker partners and Samsung’s channel to connect via API or directly to obtain access to an asset finance service that is simple, smooth and seamless.

As part of their partner model, based on the proprietary nature of their platform, Propel can tailor the application process and the specifics of the decision engine according to the needs of the partner and their customer flows.

The Propel ecosystem

Propel have been growing their business ecosystem by collaborating and partnering with several financial businesses to drive investment and support SME growth. Using the accretive ecosystem business model, Propel can help enable businesses to maximize their growth, driving productivity and performance.

The accretive ecosystem model is generally an arrangement between two, or just a few entities, where all parties have a portion of an overall customer value proposition that combined is worth substantially more than the sum of its parts. In the accretive model, the members generally don’t compete. The most common example of an accretive ecosystem is where a company has developed some sort of distinct and valuable IP and/or substantial aggregation of valuable data because of their primary business activities.

There is a realization that those assets present a monetization opportunity, but there is no appetite to invest internally to form a new business unit to create the platform and the channels to market. By selecting the right partner(s), these assets can quickly become revenue-generating without the deployment of significant capital.

Partnerships

Propel began to grow their ecosystem in 2020, when they partnered with Barclays Business Bank, to help SME business customers access best-in-class asset finance services to purchase equipment and vehicles.

Barclays, who do not offer direct asset finance services to their Business Banking customer base, introduce them to Propel as they are specialists in SME asset finance with slick capabilities – including their own scorecards for specific types of customers and their own tech automation and processes.

In 2021, they formed partnerships with UK accounting, tax and business advisory firm Azets and global payments service provider emerchantpay. The strategic partnership between Propel and Azets allows the latter’s business clients to access best-in-class asset finance solutions to obtain vital equipment and vehicles.

Recently in October 2022, Propel announced a landmark strategic partnership with Samsung Capital, the finance division behind Samsung Electronics (UK) Limited, to provide asset finance solutions to UK SMEs through Samsung’s extensive distribution channels.

While Samsung Capital will continue to serve the financial requirements of its larger business customers directly, they recognize that they can deliver better experience for the high volume, lower value transactions by partnering with Propel. It is these smaller value transactions where Propel will work with Samsung’s distribution partners and channel resellers to provide finance to Samsung’s channel partners’ business customers in the UK to acquire a wide range of equipment – including the latest phones, tablets and leading-edge audio-visual equipment.

These and future partnerships point to Propel’s innovative business model whereby they can partner with a financial institution like Barclays – but can equally be used by manufacturers like Samsung who have cash reserves and can finance their own large-ticket deals but need the systems that Propel have to provide finance to SMEs with more small-ticket deals.

The third distribution channel for Propel is to partner with a limited number of the largest UK brokers. The Propeller system brings efficiencies to the broker community, avoiding multiple input into disparate systems for the broker.

Funding

In August 2022, Propel announced its first private securitization, as part of a new £500 million financing round. As part of this competitive source of funding, Citi structured a £275 million private securitization facility, while Quilam Capital provided an additional £35 million mezzanine and working capital facility. This enabled the partial refinance of Propel’s existing British Business Bank ENABLE funding facility and support further growth. The British Business Bank will continue to be an important funding partner for Propel, with an ENABLE Funding facility that will allow Propel to provide c. £165 million of finance to SMEs across the UK.

The financing supports Propel’s emergence as a leading force in UK asset finance; and supports the business generated by its strategic partnerships with Barclays Business Bank, accountancy firm Azets and global technology leader Samsung Capital. This allows Propel to provide more than one million SMEs with access to fast and flexible finance to acquire equipment and vehicles.

Re-platforming Propel

During the pandemic, from 2019 to 2021, Propel decided to look at their business ecosystem and began to make changes to effectively revitalise and grow the business. In 2019 they completely re-platformed the back-office accounting system and, in 2020 to 2022, invested around £4 million in developing its in-house proprietary technology platform – Propeller. The origination software is a proprietary end-to-end system providing a seamless and swift experience for distribution partners and customers, from proposal through credit scoring to document generation and e-sig. In 2021, this was coupled with a brand-new Microsoft Dynamics CRM which sits on top of the platform.

Following this, in 2021, Propel streamlined its business origination model into three channels:

1. Partnership model – with financial partners, Barclays and Azets, who look at their customers and identify any potential needs for asset finance. They send information through their CRM system via APIs to Propeller. Typically, Propel are processing 1,500 deals a month with same-day decision. Through 500 referrals a month from Barclays, Propel are receiving fantastic end customer feedback with a 9.7 out of 10 customer satisfaction score.

2. Broker model – positioned Propeller into carefully chosen partnerships with UK asset finance brokers, where Propel can drive a similar partner approach and offer the same process. This is a growing channel for Propel, where they can embed tech through APIs into the broker front-end system.

3. Vendor model – this is the historic core of the Propel business; and is where the tech focus has emanated from. Technology vendor distributors (i.e. phones, tablets, telephony, laptops, audio-visual with an average ticket size of £7,500) have access to Propeller – embedded tech by APIs into their models. Propel are looking at repositioning traditional vendor models and embedding the tech into the customer journey. The Samsung partnership is borne out of this technology vendor channel.

Propel clients are all from business sectors and range from large corporates to micro-SMEs. Propel can offer regulated and unregulated agreements according to the profile of the customer.

Propel believes that SMEs still need to be educated about the benefits of asset finance; and provided with an awareness of being able to deploy asset finance lending against non-traditional assets. Asset finance is not just available for cars and yellow goods – but for production systems, technology assets and a whole range of fixed assets.

When asked about the credit profile of his customers Jon highlighted that all through the COVID pandemic, the cost of risk at Propel stayed consistently low and below industry average and continues to perform. The product range remains simple – either hire purchase or finance lease. Typically, HP is used for larger assets with a future value and finance leases are used for smaller deals for tech assets.

Jon believes that the business is a success due to the “combination of technology and people”. Propel are still passionate about the face-to-face client experience, but we also understand how Propeller has changed the customer journey providing an end-to end and efficient experience.

For more information on Propel Finance, see their website

Analysis from John Rees Asset Finance Connect’s equipment finance community leader

Propeller has been a real ‘gamechanger’ in growing the Propel business, with an investment of over £4 million in developing a tech platform that makes the experience for distribution partners and customers swift and seamless.

When developing Propeller for the vendor channel, Propel realised quite quickly that they could use their tech platform to process high volume low value deals, understanding the use of tech as the core aspect of Propel’s proposition.

Barclays and other financial institutions have been quick to realise Propel’s expert capability at processing asset finance transactions, based on the combination of their tech platform and customer focused team.

With various lenders withdrawal over time from the asset finance market, SMEs have been left with inefficient and limited funding options. The Propel model allows SMEs, through Propel’s partner, broker and vendor channels, easy access to a new asset finance provider.

The Propeller tech platform enhances the partnerships within Propel’s ecosystem by being easily connected to a partner’s CRM platform via secure APIs, allowing the client direct access to Propel’s asset finance portal without any duplication – resulting in an efficient process that gives access to funds within 24 to 48 hours from start to finish.

One of the most valuable attributes that digital technology offers a business is to give it an edge over its competitors, something every equipment supplier needs in today’s crowded marketplace, and which Propel is successfully implementing through an innovative and integrated asset finance portal – Propeller. Combine that with an understanding that people are still important and customer centricity can be human as well as technology based; and Propel has a great recipe for success.

Note: Finance is subject to status. Terms and Conditions apply. Propel acts as a lender or a credit broker for business customers only.

UK asset finance

Building a new asset finance broker-customer journey

16 November 2022

Summary

The Asset Finance Connect Summer conference brought together various members of the asset finance community – hybrid broker funder, broker, bank-owned funder, technology provider – to discuss the future of the broker in an increasingly digital world.

As borrowers’ expectations around the customer journey change, the pace of regulation accelerates and the competitive landscape develops the future of the asset finance broker looks increasingly unpredictable in the face of three key challenges:

Competition
Regulation
Technology

Guidance from brokers or advisers is as essential as ever in supporting small and medium-sized businesses in the pandemic recovery period, providing their expert knowledge on products, providers and the industry as a whole.

However, post Covid lockdowns, many consumers have become more comfortable with a digital approach to finance, while many traditional firms that might look for asset financing have moved their businesses online.

Technology is progressing and apps and mobile technology can now handle everything from quoting to CRM and proposal management, at the expense of face-to-face customer service and support.

To capture online businesses looking for asset financing, brokers need to provide the experience and relationship customers expect but in a seamless, digital approach. Many brokers are therefore having to add or update their technological systems to stay compliant and competitive.

As Christian Roelofs, CEO of Finativ noted, “the broker market itself is a very fragmented market”. There are a few very large brokers with teams of people and managing directors who have time to discuss technology and strategy, but a large segment of the market is made up of smaller managed or owned businesses with limited capacity to handle future innovation and digitalisation.

Competition

For the asset finance broker, competition is less about broker-to-broker competition, as brokers have their own ‘patch’ and client base, and more on new, often technology-enabled, entrants that are coming into the market and, in particular, on digital aggregators.

Jim Higginbotham, Group CEO of Star Asset Finance, points out below that in the customer-broker-funder value chain, there are competitors who are better or worse at different parts of that value chain throughout the industry

Higginbotham points to those businesses who can combine technology with the customer interface, providing the value add in a seamless customer experience, as the real winners in the competition: “Working together in partnership with the people who best serve different parts of the value chain is going to create the best customer outcome.”

Steve Dexter, Sales Director at Clear Business Finance highlights that no one in the market is afraid of the competition as long as it is fair and equal for all, and notes that regular communication is vital to brokers in maintaining their relationship with the funder, the supplier and the end user.

Dexter argues that while digital disruptors will enter the market, they are unlikely to stand the test of time, as they will not be capable of building similar relationships. It’s a point echoed by Neil Davies, CEO, Commercial at Close Brothers who sees the broker as having the most agile response to a changing market.

The ownership of the customer is essentially the critical piece of the puzzle that needs to be understood in terms of how competition is changing, according to Katrin Herrling, CEO & Co-Founder of Funding Xchange. All sectors are thinking about their relationship to the customers and how they can serve customers better using access to the information that they have.

Regulation

Brokers cite excessive red tape as one factor which is driving them out of business, although many independent brokers find that FCA regulation does deliver some benefits too.

The indirect regulation which reaches the broker and customer via banks is having an increasing impact on the broker and the funder-broker relationship, as opposed to direct regulation on the broker themselves. And as recent discussions on commission disclosure have demonstrated, brokers lack a voice when it comes to the creation and application of regulation.

The recent publication of the new Consumer Duty rules and guidelines will undoubtedly have an impact on brokers with implications for fees, commission disclosure and quantum of commission. The new Consumer Duty principle will expect all members of the value chain to take responsibility for achieving good outcomes for customers. Any lack of clarity about the value that brokers deliver to their customer is likely to attract increased scrutiny.

From Davies’ perspective as a lender, there will be increasing pressure to question whether the broker is sufficiently looking after the customer and providing a good customer outcome, and whether they helped to identify a vulnerable customer.

In his experience, Higginbotham believes that “delivering regulation properly is a partnership piece,” where having a genuine partnership with people in the value chain who align their approach to create a good customer outcome can only be a positive because “if any part of the process breaks down and doesn’t create a good customer outcome, everyone’s a loser”.

From Dexter’s perspective as a broker, regulations are there to protect the customer, which can only be a positive for businesses. However, when there is a supplier in the chain it becomes more complicated because often it is the supplier that is dealing with the customer. So, brokers have to make sure that the supplier understands what their commitments are and what they should be doing with the customer. Brokers should therefore be more involved in the introduction of new regulation and their impact on brokers.

Higginbotham from a hybrid-broker-funder perspective, sees the principle-based Consumer Duty as a positive for the longevity of asset finance business due to the focus on good outcomes for customers.

However, the challenge comes from distinguishing where the responsibility and the principal lies if things go wrong. Higginbotham has noticed a definite trend in relationships with funders where a lot of the financial pain for non-compliance is being passed through trading agreements back to the broker and notes “While you can’t abdicate responsibility, you can offset it through an indemnity clause.”

“Delivering regulation properly is a partnership piece.”
Jim Higginbotham, Group CEO, Star Asset Finance

Herrling does not want asset finance to be an industry “where we compete based on whether we’re compliant or not…a key principle has to be that we as an industry need to find a way that we can demonstrate we’re compliant, and not try and out compete each other by skirting around the edges.”

Herrling demonstrates that at Funding Xchange, “the way we operated from day one is that for every single customer who comes to us, we have a trail of evidence of how they’ve been treated, what offers they’ve been shown how they’ve interacted with us, who they’ve progressed with us what’s been the outcome. And that trail of evidence of interactions is providing the backbone of how we can demonstrate that we’re treating every single customer actually fairly, and fulfilling our customer duty.”

Herrling sees that this use of technology helps to remove barriers, enabling brokers to stay compliant and fulfil their customer relationship duties.

Technology

For brokers looking to stand out in the market, it will become increasingly important to adopt a digital solution that adds value across the entire asset finance lifecycle and facilitates a frictionless customer journey on a single tech platform.

The motor finance industry has been working with an enabled and efficient platform connecting brokers and lenders via API for the past 20 years, so why are asset finance brokers not following suit and investing in technology?

In asset finance, many brokers are much more comfortable sending a proposal to their customer contact, rather than going into a digital broker portal and sending something through the portal and then waiting for an outcome.

In addition to the lack of investment by brokers themselves into new digital platforms, there is also a lack of consistency between lenders of what they want brokers to supply, with brokers are left to key in an application into multiple forms that are all slightly different for each of the lenders they work with.

“Technology is not going to replace the broker in terms of customer engagement and relationships.”
Katrin Herrling, CEO & Co-Founder, Funding Xchange

Technology is not going to replace the broker in terms of customer engagement and relationships. It will, however, as Herrling notes, be there as a problem-solving tool to assess a proposal and data: “Technology has to be very, very clear about the problem they’re solving, which is reducing the time it takes to assess a proposal that comes in from a book or on a different channel.”

As a broker, Clear Business Finance’s Dexter has considered using a digital solution for delivering a service, but not to manage the regulatory burden. Dexter confesses that his view on technology is that, “as a broker, you ignore at your peril”.

However, as the next generation of business owners will be technologically proficient, brokers need to invest now to update and develop digital platforms. To provide a complete customer experience, the technology and the speed is needed to provide quick and slick customer service and a good relationship.

Star Asset Finance’s Higginbotham sees the technology solution as part of an end-to-end solution with built-in compliance creating an evidence trail automatically. Herrling agrees that a self-serve solution only works for very simplistic deals and won’t serve the customer, or the funder, in the right way. For brokers who are using technology, the digital platform can support the advisory services that they provide to their clients and can evidence that they have viewed different funders and have made a decision about which funders are suitable for their customers.

Is there a future for brokers?

The UK’s changing asset finance and regulatory landscape has presented a number of challenges for growth for brokers, as well as the tools and processes they can adapt and use to succeed. Unfortunately, the falling number of brokers across the UK is resulting in the loss of face-to-face customer support and specialist knowledge and experience.

The customer engagement and relationship which is key to the role of the broker is vital for the industry going forward. However, technology will become just as important in the modern broker’s day-to-day role to increase customer conversion, retention and profitability. Not only can digital tools help manage the repetitive manual work, but they can also manage the sales, compliance and governance processes, making brokers more compliant and data driven.

Brokers will need to adopt a seamless customer journey on a digital platform to stay ahead in the asset finance market and to remain compliant and competitive.

For more insights from this June's conference, see the Asset Finance International website

Analysis from Stephen Bassett Asset Finance Connect community head for asset finance

The debate around these elements; competition; regulation and the application of technology is not going to stop anytime soon. In my simplistic mind, until our customers all become robots, there will always be a place for human interaction; taking an interest, understanding the issues, building trust over time, answering questions, clearing up misunderstandings, providing appropriate solutions, caring etc., are all things that automated systems tend to struggle with. Most people like to work with other people, not machines, so of course there is always a place for intermediaries, like brokers, whose specialized skills enable them to help their customers fulfil their particular needs in a more timely and less resource hungry manner.

As in most other sectors, competition is a healthy thing, it tends to keep prices on the straight and narrow and it sparks innovation. When combined with the sensible use of emerging technologies to speed up processes and keep costs down, it keeps the incumbent players on their toes, defending ‘their’ territory from new approaches, and sometimes it forces them to adapt.

The element that concerns me most in this discussion, is the regulatory piece. Some regulation is clearly necessary in order to prevent excesses and ensure fairness, but I do wonder if constantly trying to adapt the existing rules to deal with yet more symptoms arising from new and sometimes inappropriate or unfair products, unreasonable costs and poor selling methods, is really the most sensible approach.

The somewhat tenuous lines drawn between what is seen as Consumer or Retail, or Business or Corporate, confuse things even further, would the same general set of ethics not apply in each area?

We seem to be building an edifice which continually adds new risks and sometimes unintended consequences for providers and also layers of significant extra costs, all of which in the end have to be paid for by the customers they are there to protect. At the same time, the options available to those same customers are beginning to decrease and the numbers of suppliers of potential support are seemingly shrinking. However, I suppose that is a much wider debate.

In the meantime, anything that technology can do to ease the burden of ensuring and evidencing compliance, due diligence and fairness, in both the regulated and unregulated arenas, has got to be a good thing, but it does need to be cost effective. There are still niches for manual systems and growing spaces for automation. In my view, those who can create the slickest combination of computer and human interfaces will have the competitive edge.

UK asset finance

Approaching the Arena anniversary: fixing the gap in UK asset finance fraud data

4 October 2022

Summary

Over 220 delegates attended the exclusive Asset Finance Connect Fraud webcast, sponsored by Acquis Data Services, reinforcing the fact that the topic of fraud in asset finance is still very much alive and relevant, and needs action now from the industry.

The Arena fraud scandal

Ten months on from the Arena Television revelations – “one of the biggest frauds in UK asset finance” – which exposed a massive hole in the collective asset finance industry, what lessons have been learnt?

Fraudulent activity at Arena had been happening for more than a decade but was only exposed in November 2021, with over 50 leasing companies impacted and total losses valued at over £280bn.

As AFC asset finance community leader Stephen Bassett puts it, “The financial services sector is under attack by fraud.” The Arena fraud was not a unique event for the asset finance industry, with fraud involving multiple companies unquestionably occurring every five years or so for ever increasing amounts.

“The financial sector is under attack from fraudsters and it is now time to defend ourselves.”
STEPHEN BASSETT

All panellists agreed that the whole industry ecosystem must be aware and engaged in the topic, with closer co-operation and communication – sharing data and experience – needed, but this is not the whole solution.

The continuing fraud phenomenon must be addressed now with barriers put up to stop fraudsters impacting the asset finance market.

Actions taken

After Arena, the Finance & Leasing Association (FLA) took part in workshops with Acquis looking at different ways of sharing and analysing data.

The FLA’s Simon Goldie, Director of Business Finance & Advocacy, confirmed that the FLA are looking at three broad work streams:

Working with Acquis – what do members think about the Lumia product, how could it be explored?
Working with Experian – looking at how the company shows data and how lenders could spot the problem earlier.
Working with all credit reference agencies (CRA) – how data is shared amongst them, how do members provide that data?

The FLA also issued best practice on fraud mitigation, with a focus on sharing, providing and using data; asset inspections; and communicating with brokers. Physical asset registers were also considered but FLA members did not see them working effectively and, realistically, they wouldn’t have stopped Arena. However, they could be part of a mosaic to combat the problem.

Bassett highlighted that the lack of shared data and information during Arena was a major issue in the scandal: “Each finance company had no idea how much was being funded by other funders…and that is the root of the problem.”

“Credit bureaus are only as good as the data they receive from the asset finance funders.”
STEVE BUDD

Steve Budd, Chief Operating Officer and MLRO at Investec Asset Finance Plc feels that the industry must supply accurate data to the credit bureaus who must, in turn, report it to their users of the service: “Credit bureaus are only as good as the data they receive from the asset finance funders.”

As Budd continued, “Until such a time where all funders provide correct data to the credit bureaus and the credit bureaus consume and share that data, we are to a large extent sailing blind.”

Following Arena, Nick Leader, CEO of Acquis Data Services received calls from his customers asking him to be involved in trying to solve the fraud issue in the asset finance industry as Acquis already receives substantial amounts of data from many players in the market.

Acquis set up workshops with the CRAs and the FLA to discuss how this had happened and how fraud could be stopped. As Leader notes, “We tried to bring the industry together to design the solution themselves.” A working party was created to design an effective accurate solution and address any concerns, such as data in data out, GDPR, marketing leakage and data storage.

Acquis Data Services was created to purely address this issue and has since built a potential solution for the industry – Acquis Lumia – a register of asset finance borrowing which will provide a clear view of a company’s current asset finance arrangements to empower confident lending decisions. Acquis Lumia currently has 35 Expressions of Interest signed to date (including seven of the top ten UK asset finance companies). The system is live but will not be released until there is sufficient scale of data on the system.

“We tried to bring the industry together to design the solution themselves.”
NICK LEADER

The way forward

John Phillipou, Managing Director of SME Lending at Paragon Bank plc pointed out that there are so many proposals on the table that “we are at risk of doing nothing the longer it goes on – we need to stop and reach a solution now!”

Phillipou noted that it is possible to find an effective solution quickly, citing a recent fraud case in Germany which was dealt with relatively swiftly and efficiently by the relevant trade association linked with a private company who formed a collaborative asset data checking tool to stop future fraud, all within six months.

A delegate at the webcast also raised the point that, in Germany, the BDL (the Federal Association of German Leasing Companies) brought together major lessors to sort out issues of fraud and, therefore, in the absence of any government regulation, should the FLA step in?

Simon Goldie highlighted that the FLA is driven by its members who urgently need an effective solution. The FLA will continue to work with Experian and Acquis, but if neither get the required market share or share data between themselves, they will return to their members for further clarity.

Steve Budd believes that the solution does not lie with the CRAs due to a historic issue where it will take too long for them to engage with all funders to protect the data that is being fed into them. Budd pointed out that Investec reported all 10 Arena loans to their credit bureau who, in turn, only reported five of them, highlighting a major problem with the credit bureaus.

There is also no co-operation between the credit bureaus as they all strive to gain market share. A credit bureau would need a larger portion of the market data to allow them to be a single data source. CRAs need to collaborate or one must have a data point of 60-70% market share for them to be an effective solution to the issue of fraud.

In this respect, Leader highlighted that Lumia is not reliant on winning market share, with data collected in a narrow direct way. Acquis Lumia will not charge for its services until it has an adequate market share.

To conclude, AFC’s Bassett painted a picture of the asset finance industry forming an indestructible circle with their ‘wagons’ to stop the fraudsters getting in. Anyone outside the circle will therefore be isolated and targeted, but these outsiders will also weaken everybody else’s defences. Bassett stressed the point that the industry must stop talking and work to find a solution for fraud now before another Arena is revealed.

For more insights from the panel discussion with Nick Leader, watch the Asset Finance Connect webcast sponsored by Acquis Data Services

Analysis from John Rees head of Asset Finance Connect equipment finance community

There was a clear consensus among the expert panel including the FLA representative that a quick efficient solution was needed in the short term. Already 10 months has passed from the discovery of Arena and, so far, there has been lots of talking but only limited definitive action.

The Acquis Lumia product brings the quick efficient solution but there seems to be some residual concerns about finance companies sharing data through a third-party company and potential marketing leakage. This issue needs to be discussed openly and addressed collectively or we will be at a standstill and the fraudsters will see our industry as ripe for attack.

The industry needs to get comfortable with the Acquis Lumia product quickly or find a different solution or we risk seeing another large-scale fraud whilst the industry prevaricates about the right solution.

Looking at poll results – 83% agree that the cost of preventing fraud is less than dealing with the effects of fraud and 57% feel that we need to improve data collection and supply – it is clear that people feel this is missing – so collaborate and act now before we have another Arena on our hands!

Its time for action!

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