Earlier this month the UK Finance & Leasing Association (FLA) published the results of its Q1 2021 Industry outlook survey of members.
The members reported that if the third UK-wide lockdown and the vaccine rollout are successful in bringing the Covid-19 crisis under control, the majority expect growth over the next 12 months. Indeed almost 70% of respondents expected some increase in new business over that period, with 37% expecting new business to increase by 10% or more.
The underlying pre-crisis strength of FLA members has helped them weather the pandemic so far, and the specialist knowledge of finance providers means the industry is in an ideal position to help drive forward government initiatives such as levelling up and net-zero.
Much of the current bullish nature of FLA members can be attributed to the support and example set by its director general, Stephen Haddrill, who was appointed to his post barely three months before the pandemic hit.
He brought with him a career background in a variety of senior positions, albeit none of them in asset finance – nevertheless these proved to bring significance to his new job. Immediately prior to joining the FLA, Haddrill headed the Financial Reporting Council (FRC) for some 10 years.
He told Asset Finance International: “A lot of what we do at the FLA is about influencing government on law and regulation. Before the FRC, I was working at the Association of British Insurers and before that at the Department for Trade and Industry and it was very much on regulatory work – so I was well prepared for that aspect of the role and had a broad view of financial services, its regulation, and the way that government views the finance industry.”
The move to asset lending
What attracted him to move into the asset finance industry? Did it seem a natural progression from the FRC?
“Yes, I suppose it did in a way. It seemed to me when I joined in the autumn of 2019 that here was an industry that was looking forward, giving enormous support to British business and very relevant to the big issues of the day which, pre-Covid, were: how do we raise productivity? how do we promote innovation more effectively? how are we going to get to net-zero? – and asset finance is at the heart of all these questions.”
Before the pandemic emerged, Haddrill foresaw an early list of challenges in his new role. “When I joined,” he said, “there was a mix of internal and external challenges. It was important to me that we reached out as an organisation and found allies for our voice. So I’ve spent quite a lot of time doing that in the last year, in terms of getting a wider group of stakeholders in through the door. We’ve now got a stakeholder advisory panel for example.
“And also joining up with other associations; we don’t regard ourselves as being in competition with other trade associations – so we’ve been working very closely with the Leasing Foundation on diversity issues and inclusion - I believe the more we can join together, the better."
At the FLA’s end-of-year round-up in December 2020, John Glen, the economic secretary of the UK Treasury paid compliment to the work of the FLA and its members. It was an almost unique acknowledgement from the Treasury, or any other government department, of the work done by members.
Haddrill was understandably pleased. “I think it was partly a reflection of the fact that Glen has been in that post for some time, so he’s got to know us. It’s also a reflection of the work we’ve put in; we sit on his business finance forum and I think we’ve been useful to the Treasury – and therefore they’ve been helpful to us.
“There are big things that he’s getting to grips with, the Consumer Credit Act (CCA) for example needs reform and he has the appetite to do that. It’s a big piece of legislation that’s been here since 1974 and it needs changing.”
Haddrill firmly believes that the unreformed CCA is restricting development of certain aspects of the industry. These include the rules around how members communicate with their customers. He stressed: “For example, when it was written there was no understanding about digital communication. We want to talk to them over coming months about the opportunities for reform and to enable firms to do business in different ways with different business models.”
The cause of non-bank lenders
One initiative that the FLA failed to make much impression on government in 2020 was the need for non-bank-owned independent lessors to gain access to the government’s Term Funding scheme. This continues to cause great concern to non-bank lenders who deal with SMEs.
Haddrill shares their concern. “However, we are persistent and we’re not giving up. We put new proposals to the Treasury just before Christmas and we have another session with them shortly to go through those concerns – and we’ll also be talking about them to the Bank of England.”
He added: “At the start of the pandemic it seemed quite alarming to some non-bank lenders. They have, however, done extremely well in avoiding any significant failures, and largely have managed to find a source of funds. I think that’s a reflection of the fact that they are well-set-up firms and have been sufficiently prudent in the way they go about business. During the year they have managed to convince their funders that is the case.
“But the fact remains that they are disadvantaged compared to the main banks and the Term Funding support. I don’t think that makes sense because they serve the SME community particularly well – and I am sure they could have done even more if they had access to that funding.”
Urging a long-term government plan
The director general has long foreseen the need for a long-term coherent plan from the government. How does he envisage such a framework?
“Our first option in this area is to use the Term Funding scheme. But the Bank of England does have some anxieties over doing that. Those anxieties stem from the fact that they don’t directly regulate a lot of these firms. They don’t know them that well and there’s also a rather misguided internal issue within government about; if you’re going to provide that support whose balance sheet does it sit on? Does it sit on the Treasury’s balance sheet or does it sit on the Bank of England’s balance sheet?
“The reason why I think this is misguided is because it’s all public money at the end of the day. What we are looking for is a British Business Bank mechanism to provide that sort of funding and for it to be readily turned on quickly.
Frankly, we’re very willing to be flexible about how it’s done – but the principles are quite clear that it’s a ready source of funding that puts the non-bank lenders on a level playing field with the banks and is quickly available.”
Living with uncertainty
The most recent figures (to end of November 2020) reported by FLA members revealed overall turnover down by around 25% on asset finance and 20% on auto finance. Behind these figures, many asset and auto lenders are struggling with arrears and the strains of all of these cause uncertainty for the future.
Haddrill agreed: “Yes, there is concern. The main concern is about the uncertainty that’s coming down the track when the furlough comes to an end. If it comes to an end at the end of April, as the chancellor has said, then are we facing a cliff edge? How are we going to manage through that?
“I think we’ll manage by adapting lending policies over recent months. They are in good shape to get through that period, but there could well be a further period of contraction in both business lending and consumer retail because increased levels of unemployment might follow. I think uncertainty is going to be with us until quite late this year.”
Guiding the government’s Green Agenda
Under Haddrill’s guidance the FLA has adopted a policy of fully supporting the UK government’s overall green agenda – especially in relation to electric vehicles. What immediate aims does the association have to promote these?
He has a series of plans underway. “Firstly,” he stressed, “we must persuade the government that they have got to stick to the plan. In the past we’ve had examples of schemes being developed – whether it’s for solar panels on roofs or whatever, business adapts to those incentives and policies – and then they change. We’ve got to have consistency in both policy and schemes.
“Secondly, I think we need quite a lot more detail. We’ve got the 10-point plan from the prime minister, but what does it really mean in practice? I don’t think we really know that yet.
“And then thirdly, we need to have a recognition that the transition in the motor market is not going to be that easy. It’s quite hard to tell how it’s going to unfold, in particular with the question over what happens to the value of a car when it becomes a used car. That’s quite hard to predict given the changes in technology that will be taking place through that period and which makes it hard to lend against – and difficult to work out what the residual value is. This all generates cost for the consumer.”
Haddrill aims to get the cost of financing for electric vehicles to be at par with the cost of financing petrol or diesel cars. He believes that some form of guarantee, or government picking up some of the risk in that area, is the right way forward. The FLA has been working with the Green Finance Institute and trying to come up with some progression in the area. “We have also,” he added, “been sharing our first thoughts with the Treasury and that’s an area that we’ll be pursuing as a priority.”
Links with mainland Europe
One of the current director general’s predecessors severed close links between the UK’s FLA and mainland Europe’s Leaseurope. What plans does Haddrill have for a future relationship?
“This is something we have reviewed and we don’t see the case for a strong ongoing link. Our position at the Leaseurope table is now that of an observer rather than as a major player. However, we are open to collaborating around statistical material and the like - if it’s of value.
“Eurofinas is an organisation we feel closer to at the present, because while we’re pleased to have severed ties with the Consumer Credit Directive through Brexit, that directive is being reviewed by the European Union. It sounds a ridiculous thing to say but Britain cannot entirely be an island, and if a major piece of legislation is changed in mainland Europe then the Treasury is bound to consider what that means for financial services in the UK.
“There’s also this question of maintaining equivalence, the umbilical cord has not been totally cut with Europe. However, it’s in the Eurofinas area that we’ll continue to maintain our interface.”
The way forward
Does he envisage servitization as a realistic prospect for asset lenders in the future?
“Yes certainly. There’s still a lot to work out in relation to servitisation, but it’s definitely happening. With some innovation in the finance sector it’s going to be the way of the future. So we’ve got to find a way – we haven’t got much of a choice really, have we?”
As vaccination in the UK proceeds apace and business prospects for asset lenders begin to look less gloomy, Haddrill strikes a note of optimism and offers FLA members his vote of thanks.
“I would like to thank them for all their support because they really have supported us well through the year. And we’ve supported them as well and I think it’s been a really strong partnership particularly around these issues of Covid, forbearance, and also working together towards the future.
“I’m looking forward to continuing this level of co-operation going forward because there is going to be some tricky issues arising this year. They’re coming up all over the place and we really need to work co-operatively and in partnership with our membership and we intend to do our best in that regard.”
UK asset and auto lenders are still working their way through their biggest existential challenge for a decade. The new Q1 2021 FLA members’ survey displays an optimism that offers great inspiration and hope for the immediate future.
Much of that optimism comes from the quality leadership and support shown at the highest level by their director general, Stephen Haddrill.