At the latest of Asset Finance Connect’s highly insightful industry conferences last week, a wide range of policy-related topics formed a key part of the discussion, culminating in an interview with new Finance and Leasing Association Chair, Paragon’s John Phillipou, conducted by David Betteley, himself a former FLA Chair. Here are some reflections on the discussion and some implications for the industry’s agenda for 2024.
FCA regulation and Consumer Duty
From the introductory comments from Edward Peck onwards, the FCA Consumer Duty rules were a common theme of the conference.
A show of hands in one session suggested only a few lessors were still handling regulated business, although I imagine this excluded some lessors accepting exempt regulated business. Those are deals from regulated customers, where the introduction is regulated broking, but the deal qualifies as exempt for lending purposes.
This year’s launch of Consumer Duty was blamed. However the shift away from regulated business isn’t new. Probably no more than 5% of lessees are regulated customers. As costs and risks grow, it doesn’t take much for the segment to become uneconomical to serve.
The economics will get even worse if the latest proposed FCA reporting requirements go ahead, as they would require expensive or even impractical systems changes. See my earlier blog here.
Meanwhile, firms looking to come into the regulated space are facing a level of scrutiny from the FCA that is on an entirely different plane to what most firms already authorised had to deal with. It’s causing many to ask whether they can operate without offering regulated business.
Does this all point to removing business finance from FCA regulation? That’s what some are calling for as part of the Government’s ongoing review of consumer credit law in 2024. An alternative solution would be a much simpler and clearer rule book specifically written for business finance, building on the work already done by lessors to ensure they meet all regulatory requirements and best practices.
Full expensing tax rules
Several speakers mentioned the Government’s full expensing tax rules, which offer 100% first-year relief to companies on qualifying new main rate plant and machinery investments.
There were concerns that full expensing exclude leasing. It's important to note that hire purchase is eligible, but some other asset finance contacts, including operating leases, aren’t. For tax purposes, hire purchase is a finance lease that includes an option to purchase that’s typically at a nominal value. So, leasing is already included, just not all leases.
We heard at the conference of calls for full expensing to be extended to all leases. This is, presumably, to permit lessees to fully expense assets on finance leases without purchase options and finance leases with purchase options not set at nominal values, and for lessors to fully expense assets on operating leases. The Government plans to review the situation in 2024.
That review might lead to some extensions, although some limits are likely to remain. But perhaps the real goal here should be ‘switchable’ allowances. These would allow the lessee to elect for the lessor to expense the asset, passing the economic benefit back through lower rates. See my earlier blog on this here.
There would need to be an auditable mechanism for how the benefits of the tax allowances will feed through to lower rates. But with switchable allowances through asset finance, full expensing would then be supporting investment by the firms that most need it, being those that are not already strongly profitable.
Fraud
The conference heard a strong willingness to collaborate across the industry to beat fraud, with take-up of the Acquis Lumia financial interest register described as being at a ‘tipping point’.
This is clearly good news, but it was noted there is also a need to be able to share suspicious activity intelligence on a more active basis to catch fraudulent activity.
We have many excellent fraud and risk specialists in the industry. Some are highly likely to identify something is amiss, but it has been too difficult for the relevant information to be shared effectively. As a result, even the largest frauds have not been identified as early as they could have been.
Sharing fraud intelligence can be done legally for fraud prevention purposes, but the process requires careful management and oversight. Just as Acquis has recognised an industry need and stepped up to propose a solution for recording financial interest, there is space for a provider to offer a robust and safe solution for fraud intelligence sharing.
Fraud intelligence sharing hasn't yet achieved the cross-industry backing it deserves and needs. Hopefully the success of Acquis Lumia will provide the spur needed for this further key step in fraud prevention in 2024.
Broker oversight
A regular theme at Asset Finance Connect has been the need for coordination of the way in which brokers are monitored by funders.
If a broker deals with twenty lenders, it can face up to twenty different portals to input data into, and up to twenty different compliance audits. That, clearly, doesn’t make sense. Solutions discussed included a shared digital portal, and a shared compliance framework and review.
The proposals are encouraging. However, it feels that something is missing, which is agreement about what good practice looks like. Questions include:
What disclosures should brokers give to customers?
What actions should they take when they have a customer needing extra support because they display a possible vulnerability?
What guidance should they give to customers about using asset finance?
What are the duties of the broker, as compared to the lender?
What is fair and meaningful to put into a broker agreement in respect of risk and compliance?
To support digital portals and new compliance review solutions, funders and brokers should first agree in 2024 on these basic points. Brokers need one set of clear guidance, in part so they know what to do even before the lender is identified.
This shouldn’t be difficult to achieve. Regulatory experts in the industry already share many common views, and where there are differences, they can be discussed and resolved. Doing this will prepare the ground for successful rollouts of the other initiatives to support the broker channel.
Green leasing
After an outstanding keynote presentation from Professor David Greenwood from The University of Warwick, conference speakers discussed the need for support from the Government with residual values on electric vehicles and other green assets, as well as support for the second-hand electric car market.
Such measures may well be justified, but it’s difficult to imagine any Government finding the cash for them.
Instead, what seems vital is that any asset finance that supports more sustainable activities – whether it is finance for an ‘obviously’ green asset such as an electric vehicle, or finance for any other assets that can be shown to be part of a businesses’ transition towards being more sustainable, is fully recognised for sustainability reporting purposes.
That full recognition is needed so that asset finance companies be confident that their activities will continue to be seen as core to parent banks. It should also help non-banks to raise funding from major investors such as pension funds and insurers, who are keen to be involved in a sector at the heart of the transition to sustainability.
2024 will be a key year for the development of new finance sector-specific sustainability accounting standards, with the work being led by the European Financial Reporting Advisory Group in Brussels and the Global Reporting Initiative in Amsterdam.
Work is needed - and has started - at the global leasing industry level to develop methodologies for measuring the sustainability benefits of new asset finance contracts.
Capital requirements
Are changes to bank capital requirements, as part of the Prudential Regulation Authority’s of Basel 3.1 rules, the elephant in the room? Certainly there were some views at the conference to that effect, with the risk of significantly higher cost of capital, if not for all banks, then at least for challenger banks (creating an even less level playing field).
The rule changes remain uncertain and complicated, with key decisions set to be taken in 2024. The Government won’t want to harm SME investment, but equally policy makers must ensure that rules don’t create unacceptable risk to the banking system. The changes will impact all types of lending, not only asset finance, so at least shouldn't leave leasing at a disadvantage.
The Basel 3.1 implementation confirms the need for more granular market-level data on asset finance risk. This would both support lobbying on prudential standards by demonstrating the low-risk nature of asset finance and help promote the availability of alternative sources of capital from investors, including pension and insurance funds.
Data is where the conference ended, with another excellent session, this time focused on AI. AI is an animal that eats data, and we heard that our industry has a lot of data that is underutilised. There are many opportunities for using the data, but it seems a key one is to better understand industry risk. Hopefully 2024 will see progress in breaking through the risk data barrier for investors, helping to mitigate the risks associated with Basel 3.1.
What to expect from Asset FInance Policy in 2024?
By now I’m sure you want to know what to expect from my business in 2024! Here’s a taster, for more details please see my Asset FInance Resources page, or give me a call to discuss.
A new financial benchmarking service covering all lenders in the industry, updated quarterly
Introduction to Asset Finance training course for those new to the sector, offered by Intuition
The Asset Finance 500 leasing broker directory, updated quarterly
Support with FCA regulation for funders, brokers, and dealers