John Phillipou became the new Finance & Leasing Association (FLA) Chair in Autumn 2023 following the resignation of Rebecca McNeil. He takes on the role at a troubled time when regulatory change is continuing to grow, and uncertainty over the economy continues to attract negative media attention. John’s challenge is to manage the impact of regulators and the Financial Ombudsman Service; to persuade the industry’s many publics of its value to SMEs and the wider economy, and arguably to find ways to engage with regulators which deliver better outcomes for both customers and the industry. John Phillipou talked to David Betteley, head of content at Asset Finance Connect (AFC) and a former chair of the FLA at the AFC conference in November.
John Phillipou started his career in financial services at Northwest Securities. After working in a sales capacity at JCB Finance and Citigroup, John moved to Deutsche Leasing as MD of UK and Ireland and then overseeing 23 countries, where he stayed for 12 years. John then spent two years as CEO at PEAC, moving to Paragon in 2019 as Managing Director of SME Lending. In 2023 John became Chair of the FLA.
In late 2022, John wrote about the 2023 outlook for the asset finance industry commenting: “With 2023 set to present SMEs with fresh challenges, our job is to provide them with stability…The refinancing of unincumbered assets and the financing of used equipment are two trends we expect to see in 2023, and this is understandable. Businesses will be making pragmatic decisions to support their balance sheets and provide themselves with the option of seeing how the year develops before committing to new investments. But it is never too soon to start researching what financial support is available and we will be pleased to discuss their requirements with them throughout the start of 2023.”
Despite unchanging risk appetite measures, 2023 saw a cautious stance from industry lenders and borrowers, brought on from an undercurrent of risk aversion (especially since Covid) and a lack of stability in the market, as a result of government changes and geopolitical conflict.
It was the duty of lenders to keep their feet firmly on the ground during the year, according to Phillipou, and to pass on a reassuring message to SMEs that they would sail through the storm as they had done during Covid. Moreover, Phillipou believes that the industry is “still crying out for that stability message from lenders as we go into 2024.”
Role of government
Jeremy Hunt’s 2023 Autumn Statement brought support and understanding to the asset finance sector from the current Conservative government. And while leasing was not included in the full expensing regime, the government has initiated a review showing a statement of intent which will hopefully have a positive outcome in 2024, with continued FLA lobbying.
In his new role as FLA Chair, Phillipou sees the government taking on a supportive role, listening and taking onboard what the FLA is saying. John Phillipou, along with the NACFB’s Norman Chambers, see that it is vital that the industry’s views are passed to the right people in government.
It is essential that the government recognises that, by lending to SMEs, the asset finance industry is helping to drive the UK economy forward by providing investments for positive business.
Under Phillipou’s leadership, the FLA will continue to lobby government and pass on the views of the asset finance industry, but he believes that it’s about getting the right industry representation to get those messages across; not just FLA board members but engagement from the whole industry because “the more people that plug in the message, the easier it will be”.
As an influential trade body, the FLA seeks representation in government discussions when looking at investment in the economy. Such talks should not simply focus on the ‘big four banks’, but rather look at investment opportunities from other financial sectors such as asset finance.
There has been a lot of negative media reporting across the financial services industry and, as Chair of the FLA, John Phillipou is hoping to change this: “We need to get the asset finance industry out to the media on a front footing and need to promote the industry”.
It is essential for the industry to identify successful client stories in individual areas and regions and highlight these achievements to MPs in local constituencies. This would build a consensus of what the industry does at a local level and get the good stories out there, according to Phillipou.
The media like to paint the finance industry as too risk adverse which is creating negative press stories. The media generally look out for big banking features not small asset finance news stories. There is, therefore, a need for the FLA and its members to collectively get the success stories noticed and promote the industry, highlighting the industry’s relevant standards and codes and its capability for funding green assets.
Over the past year new regulation has been imposed on the asset and motor finance sectors. With a particular focus on regulated business, many companies have been left wondering whether the new regulation will filter down to unregulated business.
For John Phillipou, a key word in the regulation debate is ‘proportionality’. Phillipou points to Paragon, where some business is regulated and some unregulated but “we have to look at what is proportionate to the regulated world”.
Phillipou believes that “by the time regulation impacts unregulated business, there will be a different view of the same regulation.”
While the government has encouraged the setting up of challenger banks to break though the legacy systems and bureaucracy of the more established banks, Phillipou commented that “we don’t want regulation to stifle the role of challenger banks and turn them into the old-school banks that they were created to get away from”.
The added cost of compliance has also been causing significant challenges for small independent lenders, as highlighted in the recent Asset Finance Connect UK confidence survey, with some smaller businesses exiting the regulated field.
Like lenders, brokers are experiencing the same problems. Phillipou believes that it is about driving standards, with lenders having a duty of care to make sure brokers are effectively doing business with the customer. The last thing the industry needs is brokers seeing regulation as so onerous that they leave the market.
Brokers and lenders operating regionally on the ground is essential for the industry and something that the sector does not want to lose. It is all about standards, according to John Phillipou: “we’ve got to make sure that the industry functions correctly.”
To enhance the lender-broker relationship, it is fundamental that the NACFB and the FLA work together, giving a voice to both lenders and brokers.
Managing and sharing data
While managing and sharing data leads to better outcomes and enhanced security in the industry, it requires huge investment in technology and people. Again, many smaller lenders and brokers could be left behind due to the cost of systems.
The same applies for ESG reporting systems which can bring challenges for smaller lenders due to high costs and time needed.
Big banks can sign up to more granular green reporting modules, while smaller lenders will adopt a more streamlined version (averaging data). This presents a challenge for scope 3 reporting for non-bank lenders who can’t invest in the relevant technology.
Phillipou pointed out that the FLA is looking into this with a common set of definitions and standards that all lenders, no matter the size, can use when reporting.
Since the Arena Television fraud revelations in 2021, the industry has been looking at ways to ‘fix’ the gap in UK asset finance fraud data with technological developments helping the fight against fraud.
However, many lenders report their data to just one agency which isn’t enough. There needs to be a crossover in the viewing of data and sharing it to a central source. Acquis Lumia is one such tool to aid lending decisions and help tackle fraud through industry collaboration and the sharing of data.
However, John points out that the data journey is not so straightforward. The FLA are keen to look at the data that lenders report to the FCA across their three divisions (asset, motor and consumer) as some of this data could be used by the FLA to model, for example, the green journey and see where it is going.
John Phillipou believes that the industry needs to keep evolving its processes to avoid fraud.
The role for asset finance in the coming year
A valid point was raised during the session that despite years of lobbying by the FLA, the Treasury, HMRC and Whitehall do not fully understand the importance of asset finance or its delivery channels, the tax regime doesn’t encourage it, the regulator hinders it, and non-bank lenders are largely ignored.
Under his leadership at the FLA, it is clear that Phillipou wants to drive the asset finance agenda forward with increased communication with FLA members, so they can follow the association on its journey.
Pushing into regions with levelling up, non-bank lenders can reach parts of the UK that other lenders cannot; a message that the FLA needs to reinforce with UK PLC to show that asset finance is a vehicle to influence government economic policies.
However, small non-bank lenders are currently facing a number of disadvantages:
- Cost of funds is, on average, higher than for mainstream banks
- Cost of regulation
- Development of new products
- Basel III and increased costs
Bank lenders need to bridge smaller, regional lenders, alongside British Business Bank schemes and additional help from government. It is of paramount importance to get the message across to government to get the liquidity through to non-bank SME lenders.
Again, Phillipou focuses on ‘proportionality’: we must apply (FCA) regulation which drives standards in a way that is appropriate to the markets we are serving, that are fundamentally different to consumer markets, rather than lessening regulation depending on the market which can be dangerous.
Over the coming months, the industry needs to address:
- easier access to wholesale funding
- different capital requirement options
- helping challenger banks and small non-bank lenders to fund the green revolution
- uncertainties of risk
- creation of new models and products
Phillipou believes that uncertainty in the industry is fuelling some less than positive behaviours. For example, while everyone is talking about the green transition, no one is doing anything about it due to uncertainties of risk related to residual values and an under-developed second life market.
Rather than focusing on negative perceptions of the sector, the asset finance industry needs to be proud of itself as an important part of the UK economy, according to Phillipou, and should stop apologising for its existence!
The new Chair of the FLA, John Phillipou, sees challenges facing the asset finance industry in 2024, but as a long-term member of the asset finance community he sees a stable industry that should be proud of its achievements and the role it plays in funding SMEs who are the lifeblood of the UK economy.
To address any issues, John believes that it is paramount that all industry players – whether from trade bodies, lenders or brokers – must unite to present a forward-footed, stable financial sector and a united voice to lobby on issues affecting the sector.