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.

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?

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.

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.

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. 

UK asset finance

Taking aim at fraud

28 April 2022

Summary

There is no “silver bullet” to stopping fraud within the asset finance sector – but collectively there is a great deal the industry can and must do to reduce the occurrence and the impact of fraudulent activity. That was the message from a recent Asset Finance Connect Unconference, which identified greater collaboration and better use of data as the key challenges.

The event, sponsored by global asset and auto finance technology specialist Alfa, brought together a broad range of participants from the lending, risk, regulatory and legal communities to reflect on how the asset finance industry should be addressing growing fraud risks.

Recent media coverage of developments at Arena TV may have pushed asset finance fraud into the spotlight, but it is by no means a new phenomenon. Back in the 1990s, the €2bn FlowTex fraud rocked the German market, and there have been several high profile cases since. What’s changed is the increasing digitisation within the sector, which has both increased opportunities for fraud and provided the data sources needed to combat potential abuses.

Vital data

The trade association has carried out work to identify how to move forward, given GDPR and other regulatory constraints, and share information effectively.

It is, as Simon Goldie, head of asset finance at the Finance & Leasing Association (FLA) explained, “an information data problem. It’s about sharing the right information and data, and then how you analyse it and how you understand it.” The trade association has carried out work to identify how to move forward, given GDPR and other regulatory constraints, and share information effectively.

“We think the solution is potentially around existing products or services, but they may need to change. Or we may need something new.”

Simon Goldie, head of asset finance, FLA

Good governance

Company culture also plays a part. As Roger Potgieter, partner in the Shoosmith finance services disputes and investigations team, pointed out, while lenders often have an established and very public way of congratulating the salesforce for bringing in new business, there is sometimes less of a focus on monitoring the progress of a contract. “How much importance does your business place on what happens on the back end on fraud, protection, fraud detection, and doing something about it when you are a victim of fraud?” Potgieter challenged. Fraud has never and will never go away, but the industry’s level of preparedness is critical.

“That’s one of the features of the equipment finance and leasing industry in that it does tend to be a make it, sell it, forget it product. You buy the equipment, you sign the lease agreement, you collect the rentals. And then it’s three years, five years and very little happens, unless you’re in a technology lead sector where there’s a tech refresh or upsell or upgrade opportunity.”

QUOTE FROM PARTICIPANT

What do you do about ongoing monitoring? How do you alert yourself to possible changes in financial circumstances or new directors coming to that business? Because when we talk about one of the frauds, what we’re talking about is company hijack, we have a perfectly good business that is infiltrated by fraudsters.

Quote from participant

Lessons learned

Martin Hofmann, chief risk officer at GEFA Bank, outlined developments in Germany post-the FloTex scandal, which include the creation of an asset register routinely used by around 90% of the industry to provided what he termed a “plausibility check” on transactions. The register includes serial numbers as well as additional data which allows lenders, for example, to check consistency by showing that the serial number recorded against a particular item does match the manufacturer’s usual serial number for that category of equipment. “From our own perspective, I can say that around 75% of potential fraud cases could be prevented in the past,” Hofmann noted.

“The in-life audits they don’t always have to be physical touching metal – with the technology of today you can do that digitally using online diagnostic tools that tracks assets.
“Can you get ahead of a problem? At the height of the pandemic like a lot of finance businesses, we restructured a large portion of our portfolio with proactive reaching out to the customer to support them, and that was a great opportunity to make sure things are okay. And is equipment secure? Are there any issues? That means using those touch points to keep monitoring progress.”

Quote from participant

But as John Phillipou, Paragon Bank managing director of SME lending, explained, many in the asset finance sector now find themselves “tied in a Gordian knot”, partly because of regulatory constraints and also because of the competitive nature of business, which means data sharing is not as comprehensive as is required. This was illustrated in the case of Arena TV, because as soon as different lenders gathered together on site post the company’s collapse, the inconsistencies quickly became apparent.

Additionally, Phillipou pointed out that many lenders are now being challenged to do deals from cradle to grave in three to four hours, and that pace of operations opens the door to fraud.

Future options

There was widespread agreement that the most obvious route for the asset finance sector to take to tackle fraud more vigorously was the establishment of a centralised database of asset details and customer and lender information. But while the solution appears simple, the implementation is likely to be much more complex, and will only work effectively if there is universal agreement to provide the necessary data. That requires strong leadership of any such project.

It also calls for conversations with the credit ratings agencies, who may be reluctant to share what is for them competitive information about businesses they score. But the overall concensus was of a pressing need to act now, with doing nothing not an option.

of the bigger lenders leading the way joining a consistent approach of a database or wherever it is. How we make it work, I don’t know, maybe it’s an extension of a HPI, or one of the other ones that been talked about. So assets are registered, and we all know that this asset exists or doesn’t.”

Quote from participant

“The elephant in the room is number one, that no one wants to go first. Everyone’s waiting for someone else to solve the problem. And the second piece is, that people are looking for a silver bullet, and we’ve said there isn’t one..”

QUOTE FROM PARTICIPANT

Stopping fraud in its tracks

Learning from your mistakes

“You need barriers up around your company to protect you from fraud, and you need barriers up around the industry to protect you from fraud. But if your staff don’t know what things they’re supposed to be protecting you from, or don’t feel that if they miss a step out, it doesn’t hit home, it all starts to go wrong.”

Quote from participant