UK asset finance

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

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. 

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! 

 

European automotive

Who will make money from the connected car?

Summary

A recurring theme at this year’s AFC Summer conference was the changes facing the auto finance ecosystem, with Tony Whitehorn, former president & CEO of Hyundai Motor UK, discussing the concept of the connected car and how its development will change the future of the automotive industry.

Over the past 10 years, the automotive industry has gone through a period of immense upheaval. Traditional business models, supply chains and market players are all being challenged by a wave of new models and ideas and new entrants that are shaking up the market.

Connectivity is expected to be the defining feature of ‘the car of the future’ and will revolutionise the way in which we travel from A to B. The connected car will be made up of an ecosystem of connected technologies which will enable it to transfer and process large amounts of data.

“Back in 2020, 45% of all cars that came into the UK had some degree of connectivity. Today, it is over 90%.”

Whitehorn highlights that there are three levels of connectivity:

1) The car as an enabler – the car is fitted with the hardware to allow it to produce and communicate data.
2) The OEM as an issuer – the OEM adds a payment facility to its cars.
3) The OEM as an acquiror – the car becomes an entire payment method, and this is where serious money can be made by the OEM as they own the whole payment system. This is what the OEMs want to achieve but that is not going to happen at the very outset, especially when they are up against GAFA (Google, Apple, Facebook/ now Meta and Amazon).

As Whitehorn points out, the OEMs know that they have to start with the car as an enabler, otherwise the move to the OEM as an issuer and finally to the OEM as an acquiror will not happen.

When we discuss mobility, it is simply the frictionless movement of people, notes Whitehorn. And the biggest issue today causing friction is the driver having to get out of the car and pay for products or arrange services in advance. Once you have connectivity and you add an in-car payment tool, then the friction disappears and the journey becomes frictionless.

Connected cars can provide this unique frictionless customer experience while simultaneously delivering cost and revenue benefits to mobility companies, including OEMs, suppliers, dealers, insurers, fleets and technology companies.

“On the pure connectivity side, the connected car gives you information, it gives you a better journey, and people are willing to pay for that better customer experience.”

However, the connected car can be extremely costly for OEMs. In recent times, OEMs margins have shrunk massively, mainly due to the huge investment in connectivity and electrification, and the OEMs need to accrue some of this investment back. And connectivity is a way to do this.

Using connectivity, the OEM can monetise the customer’s journey by monitoring what the driver uses and doesn’t use, and therefore can reduce their costs by only adding specifications to the car that the customer wants and needs.

While OEMs see significant revenue potential in connectivity, there have been a number of recent examples of consumer resistance; for example, in South Korea where BMW offered heated-seats subscriptions to disgruntled drivers whose new BMWs included seat heating as standard.

While automotive connectivity is changing faster than ever and significantly increasing the potential for data monetisation for players across the ecosystem, the 2021 McKinsey report, Unlocking the full life-cycle value from connected-car data, believes that it is data suppliers, such as OEMs and vehicle fleets, who are well positioned to benefit, along with insurance players, companies in the automotive aftermarket, cities, infrastructure providers, and other data customers. However, the Report urges all stakeholders to act fast, “given the industry’s current underperformance on data monetisation, new players with innovative approaches could rapidly gain an advantage over slower-moving incumbents.”

Data

When monetising data, there is a big debate raging about who actually owns the data, with legislation lacking around how the data can be used.

The customer who is paying for the hardware is not monetising the data, according to Whitehorn. They get a good customer experience, and that is essentially what they are paying for when they get greater connectivity.

On the other hand, Whitehorn believes that it is the most traditional automotive players — OEMs — who actually own the data. But in the current landscape, it is the OEMs who may find staking a claim in car data monetisation most challenging. Car data monetisation will challenge all of their current realities — such as product cycles, control over the value chain, consolidated monetisation models, and limited interaction with the end user — and lead them to quickly make changes to their approaches.

As the McKinsey Unlocking the full life-cycle value from connected-car data report confirms, “OEMs are well positioned to monetise their direct customer access and data, since very few companies have such regular and extensive interactions with their end customers. Despite the potential, many OEMs have only scratched the surface when monetising data, and their efforts often fail because they provide a poor customer experience and encounter execution issues, resulting in low retention.”

Software vs. engineering companies

As the connected car has evolved, traditional OEMs have found that they do not have all the technological expertise or experience to develop and implement all of the necessary technologies themselves. This has therefore opened up what was a relatively closed market to a wave of new entrants.

The industry is now made up of a diverse group of players, including start-ups, industry stalwarts and telecommunication companies. However, the greatest threat to the OEMs is probably that posed by the tech giants, such as Apple, Google and Microsoft, who are investing in automotive innovation. These companies have the resources, reputation and knowledge to shake up the automotive industry.

But we will wait to see if these tech giants will be able to convert their technological innovation into commercial success.

“The greatest threat to the OEMs is probably that posed by the tech giants, such as Apple, Google and Microsoft, who are investing in automotive innovation.”

Whitehorn highlights Tesla as an example of a software company expanding into the vehicle market.

For auto OEMs, building and operating service businesses is a new significant challenge. Pushing beyond the basics and making all channels “digital ready” is going to require a fundamental shift from the current ways of working at a traditional automotive organisation that may be less conducive to the digital innovation required to succeed in car data monetisation.

The OEMs are not masters of technology; they are engineering companies. And they are steeped in the legacy of being an engineering company, not a digital software organisation. The challenge for the OEM is to transition from being an engineering company to a service company. As Whitehorn notes, the OEMs do not have the “culture” or specific digital skills which hinders their ability to innovate like the high-tech players who they are competing against.

With the connected car, the OEM needs to have the infrastructure of a traditional auto engineering company, the software and digital skills of a tech giant and an in-car payment system from a payment provider. They therefore need to create partnerships to gain the necessary components.

Volkswagen recently announced a tie up with J.P. Morgan to deliver such payments services. J.P. Morgan expects that the connected vehicle, the digital payments experience and customised payment services will all become core features of business models in the future. “Auto payments encapsulate many of the characteristics of the wallet of the future,” added Max Neukirchen, Global Head of Merchant Services at J.P. Morgan.

The role of the dealer and broker

With the development of the connected car comes a shift in the traditional roles seen in the auto finance industry. Whitehorn believes that the role of the dealer is integral during these changing times, but we need to understand where they fit into this new connectivity model.

Like the dealers, Whitehorn accepts that the broker will always be around when there is excess supply over demand, and that is when intermediaries come to the forefront. Today, brokers in particular are struggling to get hold of the product, because the primary source goes to the dealer. However, this will change by 2023-2024 when we will once again have excess supply over demand. The OEM member on the agency model will therefore go to other intermediaries, which will be the broker network.

What the future holds

The connected car is the future of the auto finance industry, with connectivity levels expanding over the next five to ten years and consumers increasingly seeing the value in connectivity.

As a result of these developments, connectivity has allowed some of the world’s biggest tech companies to gain access to a market that, until now, had been effectively closed to new entrants. We will wait and see who has the capabilities, expertise and experience to further develop the connected car and stake a claim in car data monetisation – OEMs or tech giants.

Car data will become a key theme on the automotive industry agenda over the next few years and, if its potential is fully realised, it will be highly monetisable.

Analysis from David Betteley AFC Auto content leader

The auto industry is at a crossroads with connected car data. The OEMs have it but don’t know what to do with it. At the same time Google, Amazon, Apple and others are working on ways of partnering with OEMs through Android and iOS to provide better customer services. If the OEMs aren’t careful, they may find that the tech giants steal the opportunity to monetise connected car data from them. If the OEMs try to go it alone, they risk losing out on the big opportunities because the tech industry has already established a big lead.

Right now, OEMs realise that they need to do two things: develop services, and not just financial services, as the main profit generator in the business; and transition from being simple manufacturers of mechanical products to being a manufacturer and tech companies. The opportunity to make money from simply selling more vehicles ended 50 years ago.

Tech is the key to leveraging value from connected cars. With the right tech capability, connected car data has the potential to be monetised in the same way that data from smart devices has. But the capabilities of the OEMs lags behind tech companies.

OEMS have been using connected car data for preventative maintenance for two decades. But additional uses have been slow to emerge. One critical issue is who owns the data. It seems ironic that the customer has to pay for the hardware in the vehicle that produces the data but then doesn’t own the data. In truth even within the OEMs, regulatory concerns have prevented the sharing of data in a way that would allow them to leverage value from it.

Whitehorn talks about the connected car providing “frictionless” services to customers, but with the uncertainty over who owns the data, the current connected car service offerings are a long way from being frictionless.

Culture is a problem for OEMs used to selling car features. Some of the OEMs’ experiments have been ridiculed as they try to transition these into car services. We all know about the car manufacturer who is trying to charge extra to turn on a feature (heated seats) that is already installed in the car, and was formerly available at no additional cost!

There may be opportunities for OEMs and their customers that the tech giants can’t deliver. The car is able to combine charging level data with sat nav information, for example, to steer the driver to the OEMs favoured charging partners.

Connected car data provides a digital audit trail of how a car has been driven through its lifetime. A car that has demonstrably been driven carefully will not only be easier to sell, it will command a higher residual value.

Connected car data is also of potentially immense value to the industry itself in deciding end of contract residuals and enabling “pay-by-use” products to be developed, both things having the tantalising prospect of delivering use-based subscription services to customers at prices they can afford to pay.

The OEMs probably stand a greater chance of exploiting these connected data opportunities than in competing with the tech companies who are leveraging their core capabilities to deliver the rest.

European equipment

Scope 3 emissions: biggest reporting challenge yet?

Summary

ESG standards measure a business’s impact on society, the environment, and how transparent and accountable it is. ESG is fast becoming a mainstream consideration for all investors, and was one of the key topics discussed at the first summer AFC face-to-face event since Covid.

Investors are increasingly scrutinising ESG performance – and looking for companies to rise to the challenge. Environmental ESG reporting is now more prominent with increased regulatory pressure to report on emissions with Scope 3 reporting.

A panel of industry experts comprising John Rees, Community Head, Equipment Finance at Asset Finance Connect, alongside Karima Haji, Director of Transformation at Scania UK, Michiel Kranenborg, Manager Group Finance & Reporting at DLL, and René Kim, Founding Partner of Steward Redqueen debated the issues surrounding Scope 3 emissions measurement, management and reporting at the AFC Summer conference.

Scope 1 emissions: direct Green House Gas (GHG) emissions from company-owned and controlled resources, e.g., emissions released into the atmosphere as a direct result of a set of activities, at a firm level.

Scope 2 emissions: indirect emissions from a company from the generation of purchased energy, from a utility provider, e.g., all GHG emissions released in the atmosphere, from the consumption of purchased electricity, steam, heat and cooling.

Scope 3 emissions: all indirect emissions – not included in Scope 2 – that occur in the value chain of the reporting company, including both upstream and downstream emissions, i.e., emissions linked to the company’s operations.

Scope 3 emissions are all indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions. They are by far the largest source of emissions for most auto and equipment finance businesses.

Unfortunately, Scope 3 emissions are the hardest emissions to measure and manage and there are significant problems around reporting on them as there is a myriad of Scope 3 emissions along the value chain.

René Kim, Founding Partner of Steward Redqueen explains what Scope 3 emissions means for an asset finance company:  

In order to effectively manage scope three reporting, companies must stay on top of the usage data. So essentially, practitioners in the industry must know how often their asset is being operated, and what emissions it is making during the life of the finance agreement to be able to report the data.

“There are three levels to managing Scope 3 emissions: improved efficiency, cleaner fuels and new technologies.”

René Kim

Kim highlights that there are three levels to managing Scope 3 emissions: improved efficiency, cleaner fuels and new technologies:

  • Improved efficiency. Efficiency of the asset and its components e.g., machine performance, better engines, transmissions, tyres; operational efficiency – is it the right asset for the right task; pricing – what can be done on the pricing side to entice a customer to make more efficient use of the asset, e.g., usage-based business models.
  • Cleaner fuels. Liaise with vendors to see whether the assets can run on cleaner fuels; incentivise a client to use cleaner fuels.  
  • New technologies. Can newer technologies affect residual values and render an asset obsolete?

For bank-owned finance companies, banks are already falling in line with their net zero reports, while asset finance and leasing companies need to start looking at the processes and setting targets.

The first step in the process is to measure and disclose – as Kim points out, companies must “measure what you can, estimate what you must and make sure that, over time, you have systems in place to get better data, especially for new assets.” Companies must also set targets which can be difficult when you need to set a target on something that is beyond your control, but over time things will become clearer and easier. Kim warns that “not setting targets is not an alternative anymore.”

“Not setting targets is not an alternative anymore.”

René Kim

While many companies are announcing their target to be net zero by 2050, Kim advises companies to set a shorter term, for example, 2030, which means focusing less on new technologies and more on improving the Scope 3 emissions within current regulations and within current technologies.

When discussing current actions in the ecosystem, Kim highlights three areas of focus for asset financiers:

  1. The need to finance the growing demand for infrastructure, housing, and food; the whole system, not just the asset, but also the supporting infrastructure.
  2. Get involved with regulation.
  3. Engage in continuous conversations between vendors and clients: What are the technology roadmaps? What is possible on the OEM side? What are the real needs of clients? Scope 3 emissions reporting has made companies look at the planet and their carbon footprint – business is not only about profit, it is also about the reputational risk of being seen as a polluting company which can be extremely damaging for the business.  

Case study: Scania

Scania has a very strong roadmap up to 2030 to reduce their carbon footprint, by 50%, by 2025, for Scope 1 and 2, and then by 20% for scope three emissions. In 2017-18, Scania launched a plug-in hybrid vehicle and currently in Sweden, Norway and Denmark their battery electric vehicles are thriving.

Karima Haji, Director of Transformation at Scania UK hopes that “by 2030-2035, Scania should be able to offer a product that you can transition for all of your use cases across the transportation industry. We’re driving our agenda around new products, battery electric vehicles.”

Obviously, HGVs are very expensive assets and battery electric vehicles are more costly than diesel or petrol-powered vehicles, so Scania are looking at new business models, such as pay per use, to engage customers and allow them to transition towards battery electric vehicles and to reduce their carbon emissions through different business models. Haji points out that Scania want to work with their customers to make sure that the proposition is financially palatable.

In addition to introducing new sustainable products and new business models to their clients, Scania is also keen to be part of the circular economy by working across the full value chain, looking at all the components sourced, how long those components will last, and what the lifecycle of those components will be.

Haji points to the work at Scania to initially manufacture products using green steel which helps in a circular economy when it comes to regulation and reporting:

Case study: DLL

The reporting process is different for a bank-owned leasing company such as DLL, who have distinguished the various portions of their portfolio due to their portfolio being made up of various different types of assets for which there is “no single one-size-fits-all roadmap”.

DLL have therefore disaggregated their portfolio and are now working on what Michiel Kranenborg, Manager Group Finance & Reporting at DLL calls “a theory of change”, looking at every part of the portfolio where they can engage with vendors and end users to see what is possible for the end user and come up with a journey for that part of the portfolio, moving it from the current high intensity emission asset to the lower or zero emission type of asset.

DLL as a leasing company will work with the vendor to see how they can come up with a package for the end user that is attractive rather than pushing something that they cannot use.

“The key is that you should help your end users make a change, which will then be reflected in your Scope 3 emissions.”

Michiel Kranenborg

In addition to proposing increasingly sustainable packages for the end user, DLL is equally happy to promote a circular economy, helping the planet through the transition and reusing assets or asset components to create a second and third life for assets. DLL will buy secondhand assets, refurbish them and lease them out, because they believe that the value chain has not ended yet.

However, sometimes in its second or third life, the equipment may have higher carbon emissions because it is slightly less efficient than it was. However, it stops the original manufacturing process and, on a net basis, even though the emissions of the used asset are higher, they are still less than the original manufacturing costs of new equipment. This refurbishment concept can therefore cause problems when it comes to Scope 3 reporting.

Challenges

While Scope 3 reporting provides the opportunity for companies in key industries to multiply their carbon reduction impact by decarbonising their supply chains, there are several challenges when measuring and reporting Scope 3 emissions:

Data. When reporting Scope 3 emissions, there can be problems with the consistency of data, the risk of double-counting, and availability of accurate data. This is the case for bank-owned leasing companies who are not as close to the asset and data as an OEM, for example. There is also the issue of who owns the data from the asset. 

At Scania the data is owned by the customer, not the OEM. Scania may generate the data from their sensors, particularly in the Scania trucks, but they offer customers service packages, such as a data monitoring package or a reporting package, which allows the customer to monitor fuel usage, driver efficiency and the CO2 emissions from the amount of diesel.

Methodology. There can be methodological challenges involved in capturing scope 3 emissions. These include estimating emissions for suppliers that do not calculate their own emissions, defining an appropriate calculation approach for each Scope 3 category whilst recognising that double counting may occur when emissions are aggregated across multiple organisations. 

Refurbishment issues. Michiel Kranenborg, Manager Group Finance & Reporting at DLL highlights a further inconsistency with Scope 3 Reporting: “DLL do a lot of asset refurbishments as part of our sustainability drive…. but in the calculation of financed emissions, probably refurbished slightly older assets will score less than a brand-new asset. So, in the financed emissions calculations and disclosure, there is an incentive to not refurbish because that will increase your emissions.”  

The European Commission’s Corporate Sustainability Reporting Directive (CSRD) which envisages the adoption of EU sustainability reporting standards, sees refurbishment or the circular use of assets as one of its cornerstones. However, this is in contrast to Scope 3 reporting as Kranenborg highlights in the video below.

Risk of reporting. There is a risk that emissions reporting and reporting requirements will become so onerous that it will stifle innovation. As Kim notes, “companies could be very environmentally sensitive, and have good internal policies that follow a good ESG strategy. But if they can’t send the necessary reporting to their shareholders, to their regulators, it defeats the purpose of being that environmentally friendly company.”

Looking to the future

Scope 3 emissions can no longer be ignored. While it can be easy to forget the impact that extends beyond direct activities, “out of sight, out of mind” can no longer be an excuse. With such a high percentage of carbon emitted from assets along the value chain, and with so many potential benefits from reducing this carbon, it is fast becoming imperative for businesses to measure and reduce Scope 3 emissions.

Companies who are currently working to reduce their Scope 3 emissions have the opportunity to differentiate themselves from their peers and competitors. Effective Scope 3 reporting positions these companies as innovative, conscientious and forward-looking organisations who are working to reduce the environmental impact along the value chain.

DLL’s Kranenborg agrees that the world is changing and customers will see the reporting rules differently; this can already be seen when engaging with customers and seeing that vendors are changing: “it might hurt to make that transition but not making them essential in the end will hurt a lot more, because the world is changing.”

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

The overriding imperative call from the Scope 3 reporting discussion at the June Asset Finance Connect event is that the industry must act now and collaborate to solve the challenges of Scope 3 reporting and to find ways that the industry can design its products to reduce emissions not increase them.

The “challenging” topic of reporting related to Scope 3 emissions was discussed by an industry panel with plenty of audience input and participation. The discussion developed some ongoing topics that had been debated at recent Asset Finance Connect webinars.

Marije Rhebergen, global head of sustainability at DLL, commented in a recent AFC webcast that Scope 3 reporting is a very complex topic with challenging methodology. However, Rhebergen also pointed out the benefits of Scope 3 reporting from a business perspective: “This reporting creates a wealth of data which can be used to better steer the company in a greener and more efficient direction.”

Scope 3 reporting is not an easy topic for the industry to manage – partly because at this point in time the rules are not fully defined. But the message that came across strongly from the expert panel at the conference was “to get involved in the discussion so that the regulators appreciate what the industry can do”. It was strongly recommended that leasing executives get involved in the ongoing debate with the European regulators to ensure that the industry’s voice is heard in the discussions.

As René Kim commented, “the industry has not engaged with the regulator… they’ve come up with an idea that prescribes the process rather than the outcome. And I think this is why it’s so crucial that the industry gets involved.”

Patrick Beselaere, Chair of Leaseurope, who was attending the Scope 3 reporting panel discussion, urged the industry to work together, to engage in discussions with the regulators and technical experts, and also to reach out to politicians, in order to find “a good balance between the green ambition and the economy.”

Current expectation amongst asset finance industry leaders is that asset finance companies are going to be asked to report on emissions from assets that are not in their possession and for which they have limited control over the asset’s use. Let’s take a working example – a lessor provides an item of construction equipment to a civil engineering customer on a five-year operating lease. The contract has unlimited “hours” usage in its terms so it is up to the lessee as to how much he wants to use the diesel engine powered excavator. Scope 3 emissions reporting data as currently drafted would require the lessor to report the amount of emissions the excavator engine had made. That is not an easy task for the lessor unless there is some form of web-enabled reporting link between the machine, the user, the manufacturer and the lessor.

This example shows how complex Scope 3 emissions reporting is going to be for lessors and hence the urgent need for the industry to get involved in the debate as to what exactly these reporting requirements will require lessors to report.

The key messages from the AFC conference and recent Scope 3 emissions debate in the industry has been – understand the complexity of the reporting requirements, get involved in the discussion with regulators and collaborate with industry executives to solve the challenges of Scope 3 reporting. Asset Finance Connect will be seeking to enable this industry collaboration through their conferences and digital events in 2023.

European automotive

Navigating the auto finance industry in uncertain and challenging times

Summary

Mike Dennett and Spencer Halil discussed the blurring of boundaries between traditional fleet and retail auto finance markets, driven by customer demand, increasing digitalisation and post-pandemic changes.

BMW Group Financial Services and Alphabet have reorganised bringing both organisations under the single leadership of Mike Dennett as chief executive officer. Addressing an audience of over 200 delegates at the latest Solifi sponsored webcast, Dennett explained their priority was on providing a “holistic premium customer experience”. Results from BMW Group’s powerful customer forums and customer listening paths across fleet and retail revealed many common elements – both positive and negative – across both business and consumer auto finance customers. As Halil points out, “there were some common threads running through both of the organisations”, with Dennett noting that the joint customer focus of the BMW Group Financial Services and Alphabet businesses facilitated their coming together.

“The holistic premium customer experience was one of the goals in bringing the businesses closer together.”

MIKE DENNETT

Better together

BMW Group first started to look at merging their retail and fleet businesses with a pilot project called EVOLVE, designed to support the company to become stronger together while adapting to the changing business environment and fiscal environment. “By working together, we can get the best out of our people, our systems, and our processes to support our customers more accurately,” reveals Dennett.

Halil feels that bringing the two sectors together provides “the best of both worlds, where you get that variety and flexibility along with that simplicity, convenience and digitalisation. And the opportunities in this sector will come to those organisations that manage that combination effectively.”

“This coming together of leasing and retail is principally about providing flexibility, choice and value to a broader range of customers.”

SPENCER HALIL

Dennett believes that the merging of fleet and retail sectors in the auto finance industry is a “hybrid and a blend and it is shifting”.

“Fleet was to some degree reducing, the corporate benefits were reducing and going more towards salary sacrifice and back to either individual ownership or usership. But with BEVs and the potential advantages of BIK at the moment, then perhaps it is swinging back the other way,” notes Dennett. “I think it’s pretty dynamic and I think it will remain pretty dynamic, partially driven by fiscal policy and fiscal benefit in the corporate sector and if you look at the individuals, salary sacrifice and those coming out of corporate schemes, they might be looking at something different to someone who has owned their car for years.”

Connected cars – opportunities

Dennett sees car data as a tool to enable the auto finance company to provide a better customer experience and tailor services that are appropriate to the customer needs, by providing the information needed to understand market trends. This presents a potentially profitable opportunity, although lenders need to be mindful over the regulation and data protection requirements, and the question of who owns that data.

“Data is the power behind the connected car which can be used to understand market trends and behaviour.”

MIKE DENNETT

Halil feels that sharing data with fleet customers will support them in areas such as looking at their carbon footprint, increasing engagement with the management of their fleets. The focus of the connected car, according to Halil, should be on sharing the data back with customers to enrich their experience, not just gathering data for the sake of it: “Customers will only pay for it if they see it adds value.”

Headwinds facing the industry

There are many headwinds facing the industry today including the cost-of-living crisis, rising inflation and interest rates and supply chain delays, which Dennett likened to a cooking pot with ingredients that don’t go together!

Dennett warns: “It is important that we get on top of that as an industry both in terms of underwriting policy and making sure we are identifying customer vulnerabilities but also supporting customers throughout. It will be a real challenge.”

Halil sees regular communication and contact with customers, whether retail or fleet, as key in helping them understand that the auto finance company is there to support them facing today’s challenges and navigating that uncertainty.

This comes against a background of rising interest rates which are creating a lot of volatility and margin pressures in the auto finance industry which will inevitably be passed on to the customer, and when less discounts are available to customers on the forecourt, due to car supply issues, customers at the end of a contract will experience a large cost increase when they change their car for a similar model.

The price differential between ICE and BEV remains, although the gap is narrowing. And over time there will be some transaction pressure on the price of BEVs, but Mike Dennett believes that there will have to be an adjustment in the price gap going forward, even though he does not see the market slowing towards BEVs.

Regulation

While Dennett welcomes the recent publication of the new Consumer Duty, he cautions that the key to the far-reaching principle will be in the interpretation of price and value. BMW Group have been working with industry associations including the BVRLA, FLA and NFDA to discuss and agree an interpretation.

Delivering price and value to the customer will have a far-reaching impact on the value chain, especially the OEMs and captives in that chain. Dennett stresses that within the BMW Group, they “work hand-in-hand together” with the OEM so that they are all fully compliant, transparent and “there is a common understanding”.

Highlighting the PACE (Premium Alphabet Customer Experience) initiative at Alphabet, Halil explains that there was already a focus on the customer who is always at the forefront of their strategy and thinking. While they fully embrace the requirements of the FCA’s new Consumer Duty rules, Halil believes that they have “already travelled much of that journey”, and says the new principle “amplifies what was already within the regulation and makes it clear that you have to fully embrace the spirit of what is intended”.

“Consumer Duty amplifies what was already within the regulation… you have to embrace the spirit of what is intended.”

SPENCER HALIL

Dennett sees Consumer Duty as a clarification, taking things one step on from treating customers fairly (TCF). BMW Group are looking at the differences between TCF rules and Consumer Duty rules and evaluating their current processes, taking it as an opportunity to review what already stands. Halil highlights the “enhancements and evolutions” where BMW will be further refining the way in which they create and develop their products and launch them to the marketplace, making sure that products are being back-tested, monitored and supervised at every aspect of the product’s life and how it interacts with the customers.

Now that the Consumer Duty regulation has been published, Mike Dennett believes commission disclosure will again be a big point for discussion with further clarity and guidance needed from the FCA.

Recruitment of talent

As CEO of both BMW Group Financial Services and Alphabet, Mike Dennett passionately believes that “bringing through the younger generations is our future.”

The various intern programmes, apprenticeships and global leadership development schemes across the BMW businesses, both in the production and commercial businesses, are “providing opportunities for people to develop and excel,” according to Dennett. “Every day is an opportunity for us all to learn, and it is important to learn from everybody, and get those perspectives and diversity in to our workplace and into the decisions we are making.”

“Bringing through the younger generations is our future.”

MIKE DENNETT

Apprenticeships offer a “dual hybrid development” of being in the workplace and learning in tandem and applying the theory to the workplace, giving a “much broader better development”. The current “war on talent” in the business world is a driver to bring in talent to the auto finance industry.

Hybrid working – known as “blended working” at BMW Group – is actively encouraged, with BMW Group already implementing this style of working pre-pandemic. Dennett sees blended working as a really powerful option for the younger generation who are “not just looking for financial reward, they are looking for flexibility and looking for a great place to work”. Dennett also notes that the next generation of talent is “looking to have responsibility, looking to be empowered, looking at a diverse workforce where we can learn from the diversity of our surroundings”.

Analysis from David Betteley AFC Auto content leader

With BMW Financial Services and Alphabet coming together to unite their offerings to the customer, along with Lex Autolease and Black Horse being brought under a single combined leadership structure by Lloyds Banking Group, the merging of fleet and retail businesses is definitely a growing trend in the auto finance landscape.

Additionally, the changing attitude of customers and the journey from ownership to usership to subscription to Car as a Service is bringing together both the fleet and retail parts of the auto finance industry where businesses can utilise their knowledge and experience and help the customer – whether corporate or consumer – get the right product and service for their needs.

However, some 62% of the webcast delegates believe that there is still a future for purely retail and/or fleet providers.

As BMW Financial Services’ Mike Dennett highlighted, whether the auto finance industry will stay as separate fleet or retail divisions or as a blended-hybrid business, the focus will simply be on ‘the customer’ who will always be at the forefront of the industry. This is the same in every business, with the customer being the final decision maker.

With the publication of the new Consumer Duty principle and rules, the focus has shifted to delivering “good outcomes for customers”. Alphabet and BMW Financial Services will be fully embracing the new guidance, keeping the customer at the heart of the business and remaining focused on ensuring “good outcomes” for the customer through customer forums, communication, and in the way their products are created, developed and launched in the marketplace.

And while Dennett sees the current uncertain economic situation as a “real challenge” for the industry, both he and Halil feel that the customer and their vulnerabilities must be identified and they must be supported throughout these difficult times.

UK regulation

Consumer Duty: a seismic change

Summary

On July 27, 2022, the Financial Conduct Authority (FCA) introduced a new Consumer Duty to drive a fundamental shift in industry mindset. The new plans will ensure a higher and more consistent standard of consumer protection for users of financial services and help to stop harm before it happens.

The new Consumer Duty is intended to represent a “paradigm shift” in how the FCA regulates the retail financial markets, part of the move to an outcomes-based approach. Achieving ‘good outcomes’ is the primary focus of the new Consumer Duty, moving away from simply treating customers fairly.

Why do we need a new Consumer Duty?

The FCA is concerned that currently financial services do not always work well for consumers. The new plans will fundamentally shift the mindset of firms. Through its previous interventions, the FCA has seen practices by some firms that cause harm. These include firms presenting information in a way that exploits consumers’ behavioural biases, selling products or services that are not fit for purpose, or providing poor customer support. New rules will tackle the causes of harmful practices and will raise industry standards by putting the emphasis on firms to get products and services right in the first place. There will also be a focus on ‘vulnerable’ consumers.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA said: “The current economic climate means it’s more important than ever that consumers are able to make good financial decisions. The financial services industry needs to give people the support and information they need and put their customers first.”

“Consumer duty will provide a framework, giving enough space to innovate and think about things without just making it a tick box.”

Toby Poston, Director of Corporate Affairs, BVRLA

The new rules will require regulated firms to focus on supporting and empowering their customers to make good financial decisions and to avoid causing foreseeable harm at every stage of the customer relationship. Firms will have to provide consumers with information they can understand, offer products and service that are fit for purpose, and provide helpful customer service.

The Duty will extend to all firms that are involved in the distribution chain — the manufacture, provision, sale and ongoing administration and management of a product or service to the end consumer, even if they do not have a direct relationship with the end customer. All firms that have a material influence over, or determine, the consumer outcomes will be monitored under the new rules of the Duty. Paul Parkinson, CEO and Founder of Synergy Car Leasing believes that the Consumer Duty “causes us to have a look at ourselves, and look at our people and look at our processes.”

This ongoing drive by the FCA to set higher expectations for the standard of care that firms provide to consumers will require many firms to make a significant shift in their culture and behaviour.

Helena Thernstrom, Head of Legal, Asset & Invoice Finance at Natwest concludes that “the consumer duty is kind of heralding and has as an ambition a culture change across the whole of the industry.”

The first consultation paper (CP21/13) was issued in May 2021 with the second consultation paper (CP21/36) following in December 2021 after a period of consultation. The new rules were published on July 27, 2022 with a very challenging expectation for all firms to have a gap analysis completed by October 2022 and delivery of their implementation plan by July 2023 for all ‘open’ product sales and by July 2024 for all ‘closed’ products.

How will the new Consumer Duty be implemented?

The Duty is made up of an overarching Consumer Principle, three cross-cutting rules and four outcomes that support the new Principle which are summarised below:

Principle

With Consumer Duty we have a new FCA principle where a “a firm must act to deliver good outcomes for retail customers”. Many people will be aware that there are currently 11 principles, but this will bring in a 12th principle which will consistently focus on consumer outcomes. When regulators visit firms, they will want to see how the firm is demonstrating that they are complying with this in a similar way that they will expect to see the firm demonstrating how they comply with the other principles and rules that the FCA have implemented.

Principle 12 will place a higher standard of conduct on firms than Principles 6 and 7. Principle 6 is that a firm must pay due regard to the interests of its customers and treat them fairly, while Principle 7 is that a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.

Principles 6 and 7 will continue to apply to conduct outside the scope of Consumer Duty e.g., certain SMEs and wholesale business.

There will be a shift to achieving fairer customer outcomes in all areas of the product or service chain. Firms will not be held accountable for overseeing the action of other firms, but should have written agreements establishing mutual responsibilities with, for example, lenders, brokers, dealers, OEMs, captive OEMs.

Cross-cutting rules

The three cross-cutting rules, so called because they cut across every sector, set out how firms should act to deliver good outcomes for consumers. They are not aimed specifically at one particular financial services product or another, but they require firms to:

  1. Act in good faith to retail customers: Firms must conduct honest, fair and open dealings and show consistency.
  2. Avoid causing foreseeable harm to your retail customers: Firms must not cause harm to customers through conduct, products or services, and they must take proactive steps to avoid it. Consumers are not necessarily protected from all negative outcomes.
  3. Enable and support retail customers to pursue their financial objectives: Focuses on the financial objectives of the consumer in relation to the financial product or service and applies throughout the customer journey and lifecycle of the product. Firms should create an environment in which consumers can act in their own interests.

Outcomes

There are four outcomes, which are the four elements that represent the firm-consumer relationship. The expectation from the regulator is for firms to think through and to show that they are demonstrating the cultural changes and the right culture for their businesses when they are demonstrating compliance with the consumer duty. The good outcomes the FCA wants to see relate to four areas:

  1. Consumer understanding – communication
  2. Products and services
  3. Consumer support – customer service and support
  4. Price and value

For each outcome, the firm will need to think about what the meaning is for them and their sector, and what the implications are for the firm in their value chain for each of these rules:

  1. Consumer understanding: Increased requirements to make sure that you are communicating clearly with customers and that your communication provides support and enables the consumer to make informed decisions about financial products and services. The consumer must be given the information they need at the right time and presented in a way they understand. Poor communication includes promoting products and services in a misleading way or presenting customers with incomplete or distorted information. Good communication, on the other hand, is communicating clearly and highlighting key risks and considering consumers’ information needs after the initial point of sale. Communication will be key to promote understanding and help customers avoid foreseeable harm and pursue their financial objectives. Firms must: (i) tailor communication; (ii) ensure information is provided on a timely basis; (iii) look at the communication channel used; (iv) test communications to support understanding; and (v) monitor the impact of communications. The FCA confirms that ‘testing’ will be an important part of the consumer understanding outcome
  2. Products and services: The products and services must be fit for purpose, designed to meet consumers’ needs and targeted at the consumer whose needs they are designed to meet. Examples of insufficient consideration include unreasonable exit fees, insufficient controls, sludge practices that discourage exit. The FCA expects firms to monitor their products and services to remain consistent with the needs of the target market and deliver the expected outcome. They must ensure that future sales meet requirements too.
  3. Consumer support: This outcome goes further than existing rules. The firm must consider the support the customer needs and make sure their customer service meets the needs of the consumer, enabling them to realise benefits and act in their best interests. Firms should make it as easy to leave of switch a product as it is to buy the product or service in the first place. Customers should get what they paid for without unreasonable barriers such as lengthy phone calls to cancel a product or service.
  4. Price and value: This is one of the largest areas in need of review within the consumer credit marketplace. Products and services should be fit for purpose and represent fair value. The firms must assess the price at the design stage and through ongoing monitoring. Firms should introduce a requirement to set prices so that they represent fair value for their target customers. Firms must ensure that the price of their products and services are proportionate to their value. For credit products for consumers with higher credit risk, the APR should still represent fair value. There are already rules on price and value so it is unclear how the existing rules will work alongside the new rules.

“The consumer duty is heralding and has as an ambition a culture change across the whole of the industry.”

Helena Thernstrom, Head of Legal, Asset & Invoice Finance, NatwesT

Impact on the asset finance sector

The new Consumer Duty will have a significant impact on the asset finance industry as it goes beyond the simple good conduct of the company to the good conduct of the industry as a whole. It is going to have a significant effect on financial services where they have long and complex distribution chains, which could potentially involve non-regulated businesses.

Adrian Dally, Director of Motor Finance & Strategy at the Finance & Leasing Association believes that moving toward a high-level principle and outcomes-based regulation will result in a seismic change for the asset finance industry. As Dally highlights, “this is all about a significant culture change. And it’s a significantly different way of looking at things going forward. And that will be seismic.”

Pros and cons

The new Consumer Duty is going straight to the core of what the FCA is seeking to do by ensuring a higher and more consistent standard of consumer protection for users of financial services and help to stop harm before it happens. The Duty puts the financial practitioner in the driving seat about how to achieve good outcomes for their customer. As a result, existing problems caused by outdated guidance and unintended consequences will fade.

The Duty positions good customer outcomes as a differentiator; rather than enforcing uniformity, it encourages the flexible and innovative servicing of customers. In the FCA’s opinion “clarity on our expectations and firms focusing on what their customers need should lead to more flexibility for firms to compete and innovate in the interests of consumers.”

As Helena Thernstrom highlights, the new Consumer Duty can be embraced by many businesses as a way to enhance existing consumer protection as well as increasing competition.

In addition to elevating the support given to consumers by firms, there is also an opportunity with the new Consumer Duty guidelines to claim competitive advantage by being transparent. Transparency and communication will be key going forward with the new Consumer Duty. The more transparent a company can be, the better the outcome for the consumer.

Many asset finance companies have already implemented excellent compliance and customer services in their business, skills that have been “honed during the pandemic and in the aftermath”. Toby Poston, Director of Corporate Affairs at BVRLA points out that many of these skills are seen as a key part in competing with their professional colleagues and the Consumer Duty will simply give businesses a roadmap to carry on trying to compete while giving them a framework in which to excel. As Poston highlights, “it’s giving them enough space to innovate and think about things without just making it tick a box.”

In changing the culture, behaviour and focus of businesses, the new Consumer Duty guidelines will allow each company to be innovative in the way they implement the new rules and principles focusing on an outcome-based process.

“It’s about changing the culture where ultimate responsibility is on you, the firm to deliver that. And the regulator won’t be giving you yes and no answers anymore. Because that hinders innovation, that hinders the focus on the customer, or the ultimate customer whom we exist to serve,” indicates Dally. “We have to get used to a new world where the future regulator won’t be telling you do and don’t. They’ll be there. It’s an outcome-based process. It is uncomfortable, but it unlocks innovation, and customer focus in many ways.”

However, there are many concerning issues relating to the new Consumer Duty including cost, implementation difficulties, monitoring issues, involvement of prominent unregulated businesses, and, at the end of it all, not knowing if the firm is actually compliant.

The new Duty will result in additional work and mounting cost when it is unclear what the impact of the Duty will be on SMEs and consumers of current practice.

Further concerns point to the implementation of the new Duty and whether simply adding the new principle on top of current ‘treating customer fairly’ rules which focus on conduct is likely to create conflicts. It will be harder to implement the new rules than current principles, with difficulties resulting from the need to monitor the effect on customer – are they receiving the intended good outcomes? The new 12th principle can be seen to be lacking in rigour.

A firm needs to consider much more than their own behaviour. Even if a firm behaves well, it can still potentially breach the new Consumer Duty if the outcome for the customer is bad. This is magnified where there are lots of people involved in determining an outcome as you need to consider the behaviour of all companies in the chain and the effect of all of them.

The Consumer Duty has implications for firms in the distribution chain who do not have a direct contractual relationship with a consumer, but who nonetheless are involved in the manufacture or supply of products and services to the consumer and who can determine or materially influence retail customer outcomes. This will require better communication between the regulated captives and the unregulated OEMs, with more data and information flow required between the partners in the chain.

For many firms, asset based or otherwise, the consumer duty may apply to unregulated business where there is a connection to any ancillary service or where the FCAs existing rules capture certain SMEs. It does not apply to any SMEs.

The implementation of the new Consumer Duty will also require a high level of data gathering and management information, with all senior managers being responsible for ensuring that their business complies with the Consumer Duty requirements. Firms will have to consider every step of the customer journey throughout the product lifecycle, including design, communications, and customer service to assess any areas which may give rise to customer harm.

The Duty must be reflected in firms’ strategies, governance, leadership and people policies, and therefore good governance and controls will be required. Internal processes will need to be reviewed and amended, while customer outcomes will need to be tracked and measured. Customer service processes may need to be re-thought, and firms could have to review their complaints handling processes to ensure issues are identified and reported with product changes effected quickly if necessary.

Many firms will simply see the new Consumer Duty as an unnecessary, timely and costly administrative overhead, and any value gained may well be outweighed by the increase in price that finance providers will need to charge to make providing finance profitable given all the extra work. And in spite of all the extra work and cost, firms will still be unsure if they are actually being compliant with the new rules.

A further concern is whether the new rules might not actually have the desired effect – for example, it may make it harder for brokers to charge for the value they add to customers. Customers do not always understand the value of a service and cheaper is not always better.

What should firms be doing now?

Now that the final Consumer Duty guidelines have been published, firms need to ensure that their gap analysis is complete by October 2022. Companies need to look at their business and make sure that their processes are in line with the new rules, and look at the following areas:

  • Assess the customer journey throughout the product lifecycle, including design, communications, and customer service.
  • Project management – look at internal processes and implement a robust set of systems in order to track customer outcomes.
  • Look at customer service systems and communications.
  • Assess product governance – what is the benefit, what is the value of your products and services?

Analysis from Wayne Gibbard Commercial Clients and Strategy at Shoosmiths LLP

As the panel has rightly recognised, the new Consumer Duty is a paradigm shift for firms and also the FCA. It changes everything (that is at least the expectation).

The Consumer Duty is one of the largest and most encompassing pieces of regulatory reform in financial services since the introduction of Financial Services and Markets Act. Emphasising the points made by the panellists, it will require significant focus from senior managers and cultural reform throughout businesses to ensure it is delivered and embedded.

It is irresistible to argue against the overriding objective of the Consumer Duty, enshrined in the new Principle 12, “to deliver good outcomes for retail customers”. The journey for businesses to reach this standard, maintain and evidence it is going to require significant investment however.

As the panel highlighted, businesses need to mobilise on the implementation of the Consumer Duty immediately.

The FCA have recognised that the implementation timetable is going to be challenging for businesses. Following their consultation, the FCA provided for longer implementation dates, in return it expects firms to be focussed and committed to delivery throughout this period however.

To ensure that the Consumer Duty can be delivered and to meet the expectations of the FCA, it is fundamental to have a well drafted and supported project. The project plan and deliverables should be regularly reviewed, scrutinised and challenged – the FCA have indicated that may request evidence of this.

There are four key dates to remember and stay focused on:

  • October 2022 – Implementation plan agreed by Board
  • April 2023 – Manufacturers should share their reviews with distributors to meet July implementation deadline
  • July 2023 – Implementation of Consumer Duty for new and existing products and services
  • July 2024 – Implementation of Consumer Duty for closed products and services

By now, businesses should have identified a senior person (ideally an independent) who will champion the Consumer Duty within their business. This individual is responsible for ensuring the Consumer Duty is regularly discussed and reviewed. The FCA expect all board members and senior managers to be accountable for the delivery however.

In addition to the appointment of a champion, businesses should also have commenced their gap analysis and be working on presentations to their boards and seniors.

It is critical to ensure the effective oversight and governance of the progress of these discussions and be mindful of requests that the FCA may make for copies of these papers and discussions. The FCA expect there to be robust discussions and challenge by businesses.

There will be many challenges ahead as businesses complete a full and critical review of their products and services. It is important to remain focused on the deliverables and ensure engagement with boards and senior managers.

The FCA have promised to provide updates and examples of good practice throughout the implementation period, so whilst plans should be robust, they should also allow for some flexibility and iteration.

Keep the customer at the heart of your business and remain focussed on ensuring “good outcomes” for them – we can all agree and align on this.

European equipment

Building the world’s largest independent asset finance provider

Summary

After a glittering career at the very top of the asset finance sector, Bill Stephenson has put retirement on hold, opting instead to seize the opportunities cloud-based technology offers for innovation to create a new world-leading independent finance provider.

Addressing an Asset Finance Connect webinar, the latest in a series sponsored by Solifi, Stephenson laid out his ambitions in his new role as CEO of HPS Global Leasing, which include PEAC UK and PEAC Europe.

The record audience of 250 delegates from 30 countries heard Stephenson explain that a period of self-reflection during Covid had encouraged him to look for new challenges.

As he observed: “Let’s face it, there hasn’t been a new global competitor entering the marketplace in over 20 years. My aim is to build the largest global independent brand with a very strong differentiator.”

And for Stephenson, that means not working with a bank; a strong growth and acquisition strategy; and a global rather than regional presence.

Hear Bill talk about re-igniting the feeling of waking up with “hunger in the belly”.

“My aim is to build the largest global independent brand with a very strong differentiator”

Bill Stephenson

Regulation

As Stephenson acknowledged, one of the biggest challenges for bank-owned lessors right now is the impact of regulation, with compliance issues taking up senior management time that could be spent finding better ways to serve customers. During the 2008 financial crisis, a bank’s leasing arm was left often fighting for relevance as it was previously viewed as little more than a conduit for excess profits from its parent. Not any more, though, as leasing operations are now embedded as a vital part of the bank’s business.

“But the problem is that the regulators don’t understand the difference between consumer loans or mortgages and leases. All those rules that are being forced on the industry are disruptive to customers – banks are losing 5% of customers at the onboarding process as it’s so cumbersome,” Stephenson pointed out.

Hear Bill discuss how independent lessors are set to challenge the banks’ market domination.

Stephenson also predicts that in the future, successful lessors will be those who offer additional services, including maintenance and refurbishment, and who control the asset lifecycle, which will prove a further barrier to banks, particularly when it comes to new concepts such as pay-per-use.

“Banks are losing 5% of customers at the onboarding process as it’s so cumbersome”

Bill Stephenson

Technology

Stephenson told his audience that a major frustration over the last ten years has been around IT, and in particular high costs and limited flexibility. The aim at HPS is to come straight out the gate using the latest cloud-based technology and APIs for direct links with clients.

“The challenge with legacy IT systems is that you can’t just delete what you have and add a new function, in the same way as you add or delete an app on your phone. Instead you need to rebuild and then when you fix one thing, something else breaks,” he maintained.

Listen to why Bill sees cloud-based systems as the future.

In Stephenson’s eyes, all transactions need to take place at the point of sale, rather than being taken back to the office to be completed. “In a recession, there are going to be fewer transactions and that means more and more people competing for each customer. The only differentiator is how well you service that customer, and the most seamless way is to close at point of sale,” he explained.

Bill explains the changing role of the salesperson.

HPS’s current focus is on business in central and eastern Europe, the Nordics, the US and Canada, and while keen to avoid over-expansion at an early stage, Stephenson said the company is not done with acquisitions in order to build market share.

“There’s not a lot of organic growth, so we will be looking to take market share through our value proposition, which is based on the principles of service, trust, transparency and true partnership, and not on price, rebates, false residuals or fake approvals,” Stephenson declared.

In competing against bank-owned lessors, much of the “secret sauce” for success is down to creating the services customers want, innovating quickly and flexibly, and product development, all of which is driven by technology.

ESG

Acknowledging that sustainability issues are coming to the fore in both Europe and the US, Stephenson cautioned that there is no “big switch” to force compliance with a new green approach, but that lessors should work with their customers to develop the right strategy.

“There is no one silver bullet solution, and we need to be there to support vendors and clients and to help them through the transition, rather than dictating what we will or will not fund.

“We need to get the industry to move away from a ‘sell and go’ approach, as there is so much we can do around the circular economy which will impact ESG. We can help companies take product through all possible lifecycle stages and refurbishment and, at the end, extracting rare earth materials so that they can be re-used. There is only so much of that on the planet, so salvaging what we have is important,” he explained.

Hear Bill outline lessors’ roles in the second and third life of assets.

Looking to the future

In response to audience questions about the risks for lessors of being left holding “dirty” assets which had lost value because of sustainability concerns, Stephenson pointed out that the supply chain crises provoked by Covid, and subsequently conflict in Ukraine, had underlined the value of lessors controlling the entire asset lifecycle.

“We’ll see this evolve more towards a focus on selling services, maintenance and refurbishment, as opposed to the usual idea of ‘build it and burn it’,” he argued. “And one of the advantages of being a global entity is the ability to move those assets on. There is a natural transition and move towards green equipment, and that will happen.”

But for the immediate future, Stephenson is clear that utilising the latest technology to create genuinely frictionless customer experiences and to innovate new products is the way to go. With lessors able to control the whole lifecycle of an asset, the circular economy is becoming a reality for those with the flexibility to respond.

“There is a natural transition and move towards green equipment, and that will happen.”

Bill Stephenson

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

It’s fair to describe Bill Stephenson as a legend within the asset finance industry. Over the course of a 35 year career, he played a huge part in building DLL’s position as the global market leader in bank-owned vendor finance and a major player in the equipment leasing sector. As well as his CEO role, with responsibility for a €35 billion-plus portfolio, Stephenson was also a highly influential chair of the Equipment Leasing and Finance Association in the US.

So the obvious question is, having achieved so much by retirement age, and with the golf course beckoning, why take up another senior executive post?

Bill’s answer was to use the analogy of moving house – essentially, it’s always possible to improve on a property if you’ve got a lot of experience based on what you’ve owned before, and what you know new technology can deliver. So he is taking the benefit of his learning at DLL to mould a new, cutting edge, organisation.

Freed from the constraints of IT systems which have been developed over decades, with obsolescence built in, he is now looking to cloud-based technology as way of responding immediately to new requirements.

And Bill is clear that technology is only going to enhance, rather than obliterate, the role of the salesperson. That is why his response to a question from a young member of the audience about how to build a successful career was so valuable. The man who made it to the very top has two key lessons for getting there: learn to fail; and embrace rejection.

“Rejection is never personal. Hearing a ‘no’ just means you don’t understand what someone is asking to achieve,” is Bill’s view. It’s advice to take on board, as he views the greatest risk to the asset finance sector is that there are not enough of the next generation coming through the ranks.

All of us within the asset finance industry should also take to heart his other advice, which is the need for us all to join together and form a single entity to take on the regulators and make the case for our industry.

 

UK asset finance

Taking aim at fraud

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

Roger Potgieter, partner in the Shoosmith finance services disputes and investigations team, outlines good practice for preventative measures:

Know your customer: Find and verify data on individuals, the business and its directors, both at the start of the contract and as an ongoing process. A fraud may not necessarily start as a fraud, but changing circumstances may see individuals seek to exploit loopholes.

Verify title: When purchasing an asset, verify the title and the background of the seller. as without title, there is no security. There need to be checks in place at the outset to understand and make sure you are obtaining good title to the asset.

Check the price paid: Verify the value of the asset before you fund it. A mis-described or overvalued asset can leave you open to fraud with a greater exposure should things go wrong.

Know your suppliers: Run similar checks on the suppliers you are dealing with to those applied to the end customer. Establish a process for what the expectations for each supplier will be if something goes wrong – will you be looking for recovery from them? Beware that some fraud does involved collusion with suppliers.

Inspect assets: Assets need to be checked, not only at the outset to ensure that the asset you are funding exists, but also as part of ongoing audits. Is that asset being used as intended, and in the expected location?

Identify assets: Labelling and plating of assets ensure equipment is not substituted. Within your business, would this work for you as an effective fraud prevention measure? And do you have the expertise that you require to deal with it? What data do you need to share with others?

Learning from your mistakes

Stephen Bassett, head of the IAFN asset finance community, looks at the role of governance and training in combatting fraud.

The most effective baseline step in preventing frauds against your organization, is simply to ensure that staff at all levels are continually reminded of how frauds tend to be perpetrated and to understand that when a fraud is successful, it threatens not just profitability and bonuses, but also jobs and sometimes even companies.

So what do you think staff have to do, to help protect both their employer and themselves? Firstly, they must not assume that any information or request they are presented with is genuine, even if it has been handed over internally. Whether it is a bank statement, a set of accounts, or a request to change a suppliers bank details, the mantra should always be, ‘…is this real?… The next question is, what could this lead to and how can I validate things? Most of the attempted frauds I have seen have been prevented as a result of staff simply using their commonsense and following through on any doubts arising.

In contrast, nearly all the successful frauds I have seen, have been as a result of someone in the process simply failing to carry their piece out effectively: by just box ticking, believing what they have seen, or been told, without any really effective double checking; ignoring or simply not seeing the warning signs; or waiving normal protocols under perceived time or target pressures.

Everyone needs to fully understand why the rules exist, and to make sure they are followed by everyone and to tighten them up when those measures look too weak.

Falsified or cloned accounts can get filed at Companies House, bank statements and ID documents can be forged. E-mails and attachments can be intercepted, while accounts can be doctored and company ID cloned. Staff really must be made aware and ever reminded, that they and their employers are actively targeted by fraudsters.

Finance companies are seen as low hanging fruit, ripe for the picking. One simple call to get some bank details changed could reap a fraudster tens of thousands of pounds, so why would they not give it a try? Fraudsters have even been known to buy reputable companies outright in order to go on a fraudulent shopping spree and once the equipment is delivered it simply disappears.

Clearly, some people will go to great lengths to get their hands on your company’s money or your equipment, but if you have been duped, don’t just blame the fraudster; you could almost certainly have avoided it, so analyze the detail of what happened to provide training material. Then once you know what went wrong make sure staff get to see how they can all be better focused on preventative measures and why protocols need to be tightened up and properly followed.

“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

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

Asset finance fraud may have hit the headlines recently, but it’s a problem that has been troubling the sector for years and there is no simple solution which will magically make it go away. That was the universal view of our webinar participants when discussing the issues thrown up by recent events, but discussions also highlighted a real willingness to collaborate across the industry in order to find better approaches.

Doing something about reducing the risk of fraud requires a combination of actions, including improvements in training, governance and culture, as well as coordinated collaboration across the sector to systematically collect data that can be used to identify fraud cheaply and efficiently, and the deployment of appropriate technology to use that data to enable better and faster fraud identification.

As one of our speakers, Shoosmith’s Roger Potgieter pointed out, the immediate requirement is for some self help. Lenders and others in the asset finance sector need to think about how to make themselves a less attractive target for fraudsters, employing a healthy dose of business scepticism alongside strong internal checks and balances which are regularly used and reviewed. No one wants to be the weakest link, and there is also no room for complacency – controls need to be applied rigorously.

But no lender or broker operates in isolation, and one of the critical challenges identified during our discussions was the urgent need for cross-industry collaboration. An improved or better used asset register would prevent the unscrupulous from seeking finance from multiple funders for the same piece of kit, since it would be easier to check serial numbers, while a database which brings together all credit outstandings of an individual borrower would help lenders spot companies which are over-extended. It would function as a “plausibility check” as Martin Hofmann, chief risk officer at GEFA Bank, outlined has proved is the case previously discovered in Germany.

Our participants acknowledged the advantages of improved databases, since there is no one database at present which records all the borrowing from the asset finance industry. But there remain substantial hurdles to overcome, not least in terms of securing agreement from all the major players. Sharing data is key, and that means lenders, brokers and asset finance users all need to be onboard. There are also concerns that regulatory requirements, such as the GDPR, could put a brake on progress with this.

However, the discovery that some 55 lenders have been caught up in the long-term fraud at Arena TV is potentially the wake-up call the industry has been waiting for. We heard during the webinar that some of the lenders had no idea that others were involved until they met on site in the immediate aftermath of the outside broadcaster’s collapse.

Innovative technology, particularly onboard telemetry and Internet of Things, can help funders to better track and manage assets. But to effect real change in how the industry tackles fraud requires all those involved to cooperate and improve databases, so that every asset is recorded and monitored. Arena TV has proved the catalyst for the asset finance sector to start making changes.

At AFC our aim is to help the industry create communities and working groups that can bring together ideas and solution for everyone.

UK regulation

Commission disclosure: speaking with one voice

Summary

The asset finance industry is committed to greater transparency, but is divided on the question of whether or not to disclose both the existence and the amount of any commission payments. That was the clear message from Asset Finance Connect’s webcast on the topic, which questioned whether a broader focus on price and value across the finance ecosystem is needed, and ended with a call for closer working between lenders, brokers and trade associations and a thorough examination of the options.

Jo Davis, co-founder of specialist law firm Auxillias, emphasised that the asset finance sector is and will remain committed to commission disclosure.

The webcast, sponsored by LTi Technology Solutions, went on to debate the practicalities of what a move to enhanced disclosure could look like, with an expert panel comprising Mike Randall, board director of the Finance and Leasing Association (FLA) and CEO of Simply Asset Finance, alongside Andy Taylor, sales director of Haydock Finance and a board member of the National Association of Commercial Finance Brokers (NACFB), and David Foster, managing director of broker Anglo Scottish Asset Finance.

There is a need to continue to ensure that at least the existence and the nature of the commission is disclosed and expressly so whether or not the lender or broker is in the regulated or unregulated market, and that needs to be done with clarity and not hidden in the small print. We all need to think about what this would look like in practice, and to co-ordinate between brokers and lenders so it is done properly.

“there is a need to ensure that at least the existence and the nature of commission is disclosed… and that needs to be done with clarity”

Jo Davis, Founder, AuXillias

Driving forces

Observing that the Financial Conduct Authority (FCA) has not changed its position – that while disclosure of the existence and nature of any commission in regulated markets is mandated, it is only if the customer requests to know the amount that a specific figure is required – nonetheless Davis emphasised that asset finance sector participants are invited by their trade associations to start thinking hard about the question of disclosing the commission amount.

In the motor finance sector, the recent Wood case has shone a light on the issues around disclosing the existence and the amount of any commission. The asset finance industry does disclose the existence of the commission because firms are invariably required to disclose the existence of commission amounts pursuant to CONC 4.5, and therefore the FCA’s own rules already preclude Wood from being applicable. In addition, there is a whole list of distinguishing features in the motor and asset finance industry that support that Wood does not apply.

So where are we?

On regulated agreements, which as an industry even on unregulated deals, the asset finance sector takes into account, the FCA has not changed the rules – it is still the case the commission amount is disclosed upon request. In its paper around the change in commission models for the motor industry the FCA stated: “we are not convinced issuing more prescriptive rules and guidance would improve customer outcomes in a way that would justify the costs involved. Increased prescription on what to disclose, how and when, is likely to be counterproductive given the range of products and commission arrangements across the entire consumer credit industry.”

We know that the Financial Ombudsman Service (FOS) has written to a number of dealer groups who have these claims sitting with them. The letters asking for views on these ‘complex’ cases and specifically, their opinion on whether the recent Court of Appeal judgement in Wood v Commercial First Business Finance Limited & Others [2021] EWCA Civ 471 (Wood) was relevant to these types of claims within the motor retail sector. My understanding is that FOS have confirmed that they had suspended the investigation of Commission Disclosure cases submitted by claims management companies (CMCs). The FOS plans to carry out a full review into the whole CMC activity in this area and will then look to provide clarity and parameters on what it will take on as complaints as an output of that Review. This is likely but not definitely going to cover time barring and the prevailing FCA guidelines at the point of inception of any finance agreement. No specific timescale for the review was provided.

Source: Auxillias

However, both regulators and the public are increasingly demanding greater transparency in financial transactions, and in response the asset finance sector should ensure it can demonstrate it is operating in good faith. While every case is different depending on the roles of the lender and broker, against this background, Davis emphasised that both groups need to ensure they can demonstrate the fairness of the terms on offer and the fairness of the customers’ bargaining power. With regulators focusing on duty to the consumer, the price and value outcome becomes a critical consideration, particular in relation to retrospective claims of unfair relationship.

“In the asset finance market we haven’t been required by the regulator to review non-motor commission models (although the industry have ensured that they do not operate models similar to DIC models) that were banned in the motor market in Jan 2021. The asset finance industry have not yet gone through a review on commissions similar to the DiC review in the motor finance market.

But one of the things to address first is pricing in every single market. Are commissions too high, or are they adding value?” Davis pointed out.

Who makes the disclosure?

The FLA has been considering a recommendation that lenders should be the ones to disclosure payments made to brokers, although an immediate concern is that such a disclosure would not differentiate between income paid direct to the broker or intermediary and fee income passed on to other participants, such as the retailer at point of sale.

In view of the need to identify and mitigate any unintended consequences from such a move, the Asset Finance Connect panel agreed that lenders and brokers should work to build a common approach and speak with one voice, or risk seeing regulators impose a regime which may present disadvantages and difficulties for both.

Watch Mike Randall explain why he’s taken on his FLA role to help make this happen:

While Andy Taylor is clear that the gap between the two sides must be bridged:

And David Foster underlines the strength of feeling within the broker community:

Mike Randall pointed out that currently there is no clear definition of what disclosing the amount of commission means or what it would entail for the regulated and the unregulated sectors, suggesting a much wider conversation around potential options needs to happen. He, along with the other panellists, underlined the need for both the FLA and the NACFB to be on the front foot about how any changes will be implemented.

“I want to try to get lenders to understand what this is and agree a way forward, which is also in agreement with the view of the broker community. A high proportion of the lenders in the FLA rely on the broker channel to serve SMEs – there is commonality between the two groups and it’s imperative that we get this right”

“lenders in the FLA rely on the broker channel to serve SMEs – there is commonality between the two groups and it’s imperative that we get this right”

Mike Randall, CEO, Simply

For his part, Foster pointed out that brokers represent the “boots on the ground” for a lot of funders and yet while broker commission may be disclosed in future, a lender’s sales team on permanent salaries would not be required to share details of their bonus arrangements on a particular deal.

This sensitivity is important in the asset finance sector as, unlike the motor finance area where an applicant is able to drive away a vehicle on conclusion of a deal, the outcome of the deal and any commission disclosure, is markedly different.

What are the consequences?

At first glance, disclosing the amount of any commission looks like a move to level the playing field for all participants, but the panel pinpointed a number of potential stumbling blocks, including:

  • customer focus is distracted from other consideration, such as the APR, because of the emphasis given to commission rates
  • brokers and lenders withdraw from regulated business because it is too complicated to comply, reducing choice for consumers
  • while brokers may be prevented from perceived profiteering with high rates, they may also be barred from being competitive with offering lower rates

David Foster explains his concerns about unintended consequences:

While Andy Taylor underlines concerns around reducing funding to SMES

Jo Davis emphasises the need for a holistic view of any deal

and Mike Randall raises the question of what is best for the customer

Coming together

To avoid the creation of a two-speed regulated/unregulated market, and choking off funding to groups such as SMEs, the panel was unanimous that the main industry bodies need to work closely together to explore how why commission disclosure would operate. Both Randall and Taylor pledged to find ways for the trade associations they represent to start to do this, with regular updates on progress.

Mike Randall discusses the case for strengthening the links between funders and brokers:

Andy Taylor calls for a joined up approach between the FLA and NACFB

For her part, Davis underlined the need for action across a broad range of options, to meet the challenges facing the asset finance sector, encompassing not only the voluntary decision on commission disclosure but also price and value considerations. In Davis’s opinion, the commission models, price and value considerations need to be undertaken first.

Analysis from Jo Davis co-founder Auxillias and head of IAFN compliance community

As contributions to the AFC webinar demonstrated, discussing commission disclosure prompts strong debate within the asset finance community. On one hand, there is concern that done badly, it will disrupt the financial stability of the market and reduce competition. On the other, some voices believe that it would create significantly more transparent outcomes for consumers.

The industry is divided on whether or not full disclosure of the amount of commission is something that is necessary when the regulator or case law (with any persuasive authority) does not dictate this to be the case within our sector, coupled with concerns about the operational changes, additional resource, upskilling and training required. And of course we need to remember that both lenders and brokers are still in early discussions on this and as yet no conclusion has been reached.

However, it’s my view – and this was echoed at the conference – that the industry needs take a wider view of the issues and to be reviewing its price and value proposition first. This needs to be done anyway in light of the proposed changes on Consumer Duty by the FCA, and it is potentially a complex process.

In brief, Consumer Duty is much wider than treating customers fairly requirements (TCF), with the regulator seeking an industry-wide shift in the treatment of retail customers. It will not apply directly to the unregulated market, but as the asset finance market has a mix of regulated and unregulated products, firms are likely to be caught and therefore need to consider the FCA proposals as the timescale for implementation currently proposed is tight.

We already know with Consumer Duty, the regulator has put the onus on firms to undertake fair value assessments, and ensure the total price paid by consumers is reasonable in relation to the benefits offered by the product or service.

Price is the most important aspect of any business model, so hence the level of important the FCA places on this. We’ve seen with price interventions in other markets the FCA can make a significant impact.

Price and value outcomes

When considering price and value, a key starting point is to look at where do the profits come from? Which part of the supply chain is generating the most profit? If the business model is built on a long distribution chain like asset and motor finance for example, with cross-subsidies and tangential revenue streams, it is more likely that the model will need a full review as there will likely be risks to address and the model be open to challenge.

Manufacturers and distributors must be able to obtain sufficient detail, in order to undertake a value assessment, or otherwise it will be very difficult to justify the continued sale of the product.

Here are some example questions for manufacturers that might be applicable for the asset finance market:-

  • Could I demonstrate fair value across all customer types – including vulnerable customers who may have a different experience of the product?
  • Does my value assessment hold true for closed book products?
  • Are my senior managers clear they will be accountable for the outcomes of the value assessments?
  • Does the funding represent the economic life of the equipment?

And a couple of examples of questions for distributors:-

  • Do I fully understand the nature of the product, and the benefits and limitations the customer receives at point of sale?
  • Am I able to obtain from the manufacturer sufficient information in order to make a value assessment and can I show that the services I provide add value?
  • Could I demonstrate fair value across all customer types – including vulnerable customers who may have a different experience of the product?

Looking to the future

While one argument against moving to voluntary disclosing the amount of the commissions is that customers typically have little interest in the amount of commission and rarely ask, there are also arguments in favour regarding the voluntary move to the disclose of the amount of commission such as why would anyone be reluctant to reveal the existence of commission, or its value, assuming that it is fair value?

The challenge comes in circumstances where a finance commission is subsidising a less profitable part of the transaction. The overall price paid by the customer may be correct, but income to the seller is distributed badly, and hence the reason why the price review is important.

However, I think price and value will be challenging to resolve at an industry or trade body level, given that those functions need to be very clear that price is not discussed between competitors. That said, a general framework or set of principles could be established.

But to get to a truly circular economy, where assets are routinely used, refurbished, reinvented and recycled, requires a lot of work. Marije is clear that the asset finance industry as a whole, needs to get together to work effectively on this, and to align to manage some of these topics.

Not least of the challenges is the complexity of the reporting required, and that is an area where the sector will want to collaborate to ensure its particular requirements are acknowledged. Working groups are already being contemplated to tackle such reporting issues, and the asset finance industry needs to unite to make its voice heard. Finance providers will want, for example, to be part of the discussion on how to measure and report on their material emissions – the Scope 3 emissions that come from upstream asset manufacture and downstream usage of assets. There is no doubt, however, that the push to make more of the assets available is set to be a guiding principle for years to come. The asset finance industry has a clear role to play, given the wealth of data available on asset usage, maintenance, output and lifecycle.

AFC is ideally placed to help the industry create communities and working groups that can bring together ideas and solution for everyone.

European equipment

SGEF: Sustainability focus heralds new ‘Golden Age’ for asset finance

Summary

Pandemic disruption underlined the need for the asset finance sector to be agile and reactive, and lenders who built strong bonds with their customers and vendor partners have reaped the benefits. Now the industry needs to adopt the same approach to deal with the challenges presented by the sustainability agenda, according to Jochen Jehmlich, CEO at Société Generale Equipment Finance (SGEF).

Speaking at an Asset Finance Connect Senior Executives Fireside Chat, sponsored by Solifi, Jehmlich predicted a potential “golden age for asset finance to come”, pointing out that the urgent pressure for businesses and the whole economy to adopt climate-friendly ways of operating means that all assets will need to become greener.

Jehmlich predicts a potential “golden age for asset finance to come”,

“Countries and governments have committed to reducing CO² emissions dramatically over the next few years. That means the whole economy has to run on electricity or hydrogen. It’s not about whether as lenders we should fund only solar panels or wind turbines—it’s about exchanging all assets for greener options.

“In areas like vehicle fleets and commercial equipment, everything will need to be replaced”

Jochen Jehmlich

Covid-19

While acknowledging the pandemic had come as a “big surprise and we were not super prepared”, Jehmlich said SGEF’s decision to offer a moratorium on payments and subsequently a staged approach to scheduling repayments had proved successful, with almost all customers back to regular payments by the end of 2020.

“We were proactively seeking a joint way forward. You build good customer relations in the bad times, and not the good times,” he noted.

Jehmlich also pointed out that, with offices shut overnight and overseas travel on hold, digital transformation had happened at a much faster pace than previously anticipated. Within a month, all employees were working virtually, and digital technology became a lifeline.

“Suddenly it was possible to sign a contract from home and all the hurdles the legal department had raised before were pushed aside. We have made a jump forwards in terms of digital working”

Sustainability

The focus on ESG issues at both organisational and country level is proving to be an equally disruptive event, as is already evident in the auto industry. There is also pressure from governments who are linking funding subsidies to investment in green technologies and approaches.

“There is a clear understanding that there is a connection between global warming and CO² emissions, and countries and governments have committed themselves to reduce CO² dramatically. It’s not that all our assets we finance today will get greener – they all have basically to be exchanged. All these replacements have to be financed, and we should be in a position to catch some of it,” Jehmlich stated.

SGEF, as part of a big multinational group, has already made a tranche of sustainability commitments, including dropping out of financing anything related to coal, withdrawing financing for oil and reducing and eventually ending lending for certain forms of gas.

“But we are not converting into NGOs – we are still profit driven organizations with a decent return on equity targets. We don’t want to end up with stranded assets or equipment with no value, but the question is how we make money with solutions that are attractive to our customers,” Jehmlich said.

Residual values

One key issue is identifying and managing the risks in financing a new generation of assets based on constantly evolving technologies. ‘We can see this already, for example with electric buses for communities. They are used to the idea there is an open residual and they give the bus back after a while. Whilst we would have been prepared in the past to take it, or the manufacturer would take it, nowadays nobody wants to take it because a bus can run for eight years. Nobody knows how the battery life cycle will look in eight years,” Jehmlich pointed out.

While the auto industry has been the first to experience complete disruption as a result of new technologies, Jehmlich forecast that other sectors will also undergo a revolution. For example, as pressure grows for agriculture to focus less on meat production and more on plant-based production, that could see the introduction of new types of equipment, perhaps smaller assets which target specific activities.

“So, we look for new [green] assets, try to find solutions to finance them, and try to integrate subsidies,”

Jochen Jehmlich

Pay per use

One option is the growing interests in “pay per use” equipment deals, priced on a consumption basis. This requires the traditional approach to calculating residual values and pricing risk in contracts to change.

“We are talking about the circular economy, where the lender funds a new asset which the manufacturer subsequently refurbishes for a second life as a used asset, and which at the end of its life is broken down into parts which are re-used. But no one will jump into this new environment without thinking carefully about which risks they will take,” Jehmlich explained.

Currently, the second life value for a solar panel, for example, is unknown. But while electric assets are likely to be more expensive at the beginning of their life, the maintenance and running costs are potentially lower, suggesting they may have a longer life.

“That opens up the way for lenders and manufacturers to build a long term relationship with the customer and to sell lots of services, for example, updating services,’ Jehmlich said.

However, he cautioned that the uncertainties over who will take the risk over the life of the asset mean a true “pay per use” solution was some way in the future. Currently it is limited to certain areas, such as photocopiers, where there is a high volume of customers sharing one piece of equipment and where levels of usage are reasonably predictable. Nevertheless, such deals have to take account of not only the credit risk if the customer defaults, but also utilization risk, for example if there are problems in a particular industry sector so that turnover falls or customers desert that particular company.

But Jehmlich closed the session with a glimpse of the future possibilities. SGEF is working with Philips on a project which will see the medical equipment supplier take over the whole operation of a clinic for a 10-year period. The customer will pay monthly instalments, and the supplier will take care of the equipment and ensure the technology is upgraded as required.

He also put the asset finance sector on notice that change is inevitable. “I’m always astonished when at a leasing conference, how much less talking there is about the digitialization of the asset finance industry. If you compare that would other parts of the universal banks, there complete areas have been completely disrupted. And banks have been expelled from some areas. So we have to be aware that once in a while, there could be a disrupter coming in showing us a much simpler form of the industry, one we can’t imagine right now. Compared to the whole banking industry, business leasing and asset finance is quite a conservative part that goes very slowly, but that must not be the case in the future.”

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

As head of SGEF, rated as the number one asset finance lender in the AF50 European rankings, with €9.8bn of new business across 35 countries, Jochen Jehmlich is very clear about one thing – it is no longer business as usual.

Covid-19 has already disrupted the sector, as some big businesses found they could no longer operate during the early days of the pandemic and so were at risk of defaulting on contracts. But as Jochen points out, by staying close to customers and building up relationships, it has proved possible to reschedule payments and bring lending back on track.

And in some ways, pandemic-induced change has been good for the industry. Digital working has become the norm, offering efficiencies and opening up new opportunities. And with supply chains squeezed, companies and their customers are more prepared to look at how to make the most of the assets they already have in hand, through better utilisation.

But the biggest change to come, Jochen predicts, is the requirement to respond to the intense pressure to move to a more sustainable model of working. The “use and throwaway” society, which consumes without thought for how goods are manufactured and what happens to them at end of life, is at an end. At first glance, this wipes out the traditional model of financing an asset for a finite time period, and then replacing it with a new item.

However, lenders have no choice but to look for new solutions, as government, business and the public make it clear that steps must be taken to address climate change and the adverse environmental impact of “dirty” industries like coal and oil.

That presents a challenge for asset finance providers, because the new “green” assets are based on evolving technologies and lack the track record necessary to assess risk and residual value.

As Jochen points out, this is already evident in the automotive sector and is set to spread to other industries imminently. One option is to move to a “pay-per-use” model, whereby multiple users have access to an asset and payment is assessed according to utilisation. While simple in principle, this is more difficult to manage in practice.

But as Jochen emphasises, the asset finance sector is going to have to find solutions to these dilemmas. And for those lenders who do, there are rewards ahead, with predictions of a ‘golden age’ for asset finance as businesses seek to replace older equipment with new, green alternatives. This is not the moment wait and see, because as Jochen explains, there are plenty of disruptors waiting in the wings to seize the opportunities that traditional lenders may be too slow or too timid to explore.

We are discussing what ESG means for the asset finance industry, and progress towards new models, in our equipment finance community. Register for our webcasts and join in the discussions.

European equipment

DLL and ESG: a vision which marries profit with purpose

Summary

For DLL, with over 50 years as a global asset finance leader and a presence in more than 30 countries, creating long term partnerships has been critical to success, and the lender is now actively seeking to spearhead the push to more sustainable solutions for partners and end users, according to Marije Rhebergen, global head of sustainability.

“Increasingly our partners are asking us questions about the overall sustainability of their assets and asset solutions, rather than just the productivity of those assets”

“With many of our clients we are exploring ambitions to achieve net zero emissions and to move to a circular economy. But we can only do that together in partnership. The same is true of our own industry – we need to share experience to bring the industry to a higher level.”

Speaking at an Asset Finance Connect webinar, Rhebergen highlighted the growing pressures to bring ESG factors into consideration in contracts, among them changing public opinion. A recent DLL employee survey found 80% reporting that prioritizing the environment and sustainability was “very important”, while 75% ranked environmental impact first in importance, higher than profit.

“We are a very commercial company, so I thought people would see profit as most important. This doesn’t mean that we shouldn’t continue to be commercial, but we need to find ways to manage a profitable business and also seek to reduce the environmental impact of what we do. People feel a sense of urgency about this,” Rhebergen said.

Rhebergen’s observations struck a chord with Nick Leader, CEO of webinar sponsor Acquis, who observed that “We already have a very strong ethos about being transparent, so the real question is how early should we be engaging ESG into our conversations? And how do we maintain that culture within our own organizations and help create a matching culture and mind set with our partners, because the more they buy in to any solution, the more they will be wanting you to help them get there.”

Business challenges

In response, Rhebergen pointed out that at a very early stage clients are seeking analysis from an ESG risk perspective, and this requires a new way of looking at the traditional equipment life cycle, changing the nature of risk assessments. “ESG is being embedded in the credit risk and implementation process, and that can prove challenging. Lenders have always done broad checks in areas such as sanctions, but now we are being asked to consider both local legislation and a company’s own ethical policies in certain areas,” Rhebergen pointed out.

While initiatives such as the EU’s Corporate Sustainability Reporting Directive due to go live in 2023, the EU taxonomy, and national and global ESG requirements changing “at the speed of light”, Rhebergen said it was complex and challenging for lenders and their customers to ensure they were meeting ESG best practice requirements. A particular concern is accounting for responsibilities for “Scope 3” emissions, which are those occurring upstream and downstream in the supply chain.

“In some cases lenders may not know how the equipment they are funding is being used, making it difficult to assess potential ESG concerns”

Business benefits

“But tracking assets creates a wealth of data. This can be used to give a better steer to a client on how to move in a greener or more efficient use of assets direction, but it also provides new business opportunities, such as helping companies to develop offsetting propositions,” Rhebergen explained.

Pointing out that recent research showed less than 9% of the precious minerals used are recycled back into use, Rhebergen noted “this is a waste for those who are working to extract them and environmental burden, but it’s also an economic loss. What if we could bring those resources back into the loop – we’d have a much more effective economic model alongside the environmental benefits.”

The solution is refurbishing and remanufacturing equipment, and lenders being prepared to finance used equipment. The supply chain shortages experienced during the pandemic have served to highlight the business opportunities here, pushing second and even third life sales higher up the business agenda.

“To what extent you can build a circular solution depends on the user type and the value of the asset over time, and whether it is designed in a modular way so that elements can be upgraded when needed. For high value assets that retain their value over years, we are increasingly looking at a circular model.”

However, she cautioned that ESG pressures themselves could have an impact too, as an asset can lose value when legislative and regulatory changes are made.

“There is clearly residual value risk in funding diesel, which could become a hugely devalued asset class, but then there are also risks to funding newly emerging asset classes such as EVs because the technology evolves very quickly in the early stages,” Leader added.

New models

Rhebergen pointed out that the switch from traditional ownership of an asset towards paying for usage is also gaining traction, encouraging new ways of using assets. Citing the example of agricultural equipment, Rhebergen said there were opportunities for manufacturers and lenders to work together using smart solutions which encourage more resource efficiency, and maximize asset utilization.

“And of course there is the option of sharing an asset or Pay-per-use – where an end user only pays for the usage of the equipment, not a fixed monthly cost. The benefit is better alignment of cost and revenue. Here you are talking about active asset management, compared to traditional asset management which is passive. Normally you assess the asset value at the beginning and the end of the contract, but now you are looking at what is happening during its use,” Rhebergen stated.

With that closer link to the asset, she argues, lenders are better able to support the transition to a circular economy, using telemetry and onboard computer systems to optimize maintenance and repair, for example.

“The next generation in the workforce is very interested in ESG and by linking that to our strategy now, [we can] marry profit and purpose”

Marije Rhebergen

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

Up until recently, ESG issues have been seen as a social rather than a business issue, but as outlined by Marije Rhebergen, head of sustainability at one of the world’s biggest asset finance providers, they are now firmly in the corporate mainstream.

So far, most of the emphasis is on the ‘environmental’ part of ESG, with lenders increasingly aware that they need to know much more about where and how an asset is being used. But as Marije indicates, social concerns are now rising to the top of the business agenda, while governance is also proving critical.

Her bold conclusion is that it is entirely possible to be profitable and sustainable at the same time. Indeed, the push towards more environmentally-friendly process is actually opening up new lending opportunities in second and third life equipment deals which if well managed could bring even greater commercial rewards.

But to get to a truly circular economy, where assets are routinely used, refurbished, reinvented and recycled, requires a lot of work. Marije is clear that the asset finance industry as a whole, needs to get together to work effectively on this, and to align to manage some of these topics.

Not least of the challenges is the complexity of the reporting required, and that is an area where the sector will want to collaborate to ensure its particular requirements are acknowledged. Working groups are already being contemplated to tackle such reporting issues, and the asset finance industry needs to unite to make its voice heard. Finance providers will want, for example, to be part of the discussion on how to measure and report on their material emissions – the Scope 3 emissions that come from upstream asset manufacture and downstream usage of assets. There is no doubt, however, that the push to make more of the assets available is set to be a guiding principle for years to come. The asset finance industry has a clear role to play, given the wealth of data available on asset usage, maintenance, output and lifecycle.

AFC is ideally placed to help the industry create communities and working groups that can bring together ideas and solution for everyone.