Respondents included motor specialists, manufacturers’ captive lessors of a variety of equipment types including commercial vehicles, yellow goods and ofﬁce and IT equipment, and private equity houses and outsourcers.
Derek Soper, Foundation chairman and one of the report's analysts explained: “The ﬁgure anecdotally discussed in the industry is that no more than 20% of assets are ﬁnanced through leasing-type arrangements, but accurate data is sparse. These qualitative in-depth interviews, all conducted by Fellows of the Leasing Foundation, indicate that current statistics may under-report the size of the industry by between 30 and 50%.”
He added: “There are many organisations whose activities do not appear in current statistics, including extremely large organisations whose products are in fact leasing but are rarely called ‘leases’. We think that it's time to redeﬁne leasing to include what are, in reality, leases.”
A variety of definitions
The research investigated how leasing was seen, what products are similar to leases, and how interviewees looked at hire, rental, managed service contracts and subscription contracts in their businesses.
Those interviewed offered a variety of definitions of leasing. These included “rental for the use of an asset or service”, contract hire, asset finance, hire purchase and leasing with an option, and “managed services would be included in the term leasing as would leasing vehicles.”
Some interviewees suggested that ownership of the asset gives more security to the lender than with a loan since it “provides an economic way to acquire an asset repayable by instalment.”
Other interviewees recognised that the financial services landscape is changing, and that even for a product such as software that has no residual value they “provide a lease as a solution… leasing has definitely changed in recent years and we now provide much more than just a standard leasing product.”
Interviewees discussed contract hire, asset-based lending, rental, hire purchase, lease with an option, loans, invoice discounting and factoring as being similar to leasing “that might not be necessarily just a big asset and might be short term like renting”. The consensus was that, increasingly, the leasing product is considered as a type of loan, recognising that in some cases services were included in the contract and that “all are lending in some way.”
Respondents were asked:
Do you recognise hire, rental, leasing, managed service contracts, wet leases, subscription contracts or charters as being the same, or similar, to your core business?
Almost all preferred a very narrow definition to describe their activities, even though they saw these products as similar to leasing. Interviewees seemed to want to be clear about their core products, preferring a conventional definition of their own business because “paying monthly for future requirements like tyres and subscription agreements seem more akin to an insurance contract than a lease.”
Do you include both consumer and business finance in your leasing business?
The majority of our interviewees only do b2b (business to business) transactions, but a number do conduct consumer-facing business and include this in their leasing figures: “[in the case of automotive financial services] leasing is primarily a business product but we are now seeing more usage of operating leases by consumers.”
How do you measure success?
Most companies had a form of measurement of ‘return’ – return on capital employed, internal rate of return, and return on assets. They also include customer satisfaction or other internal measurements as “critical” elements of success. Manufacturers and captives differ in their success measures – captives’ results and are more likely to be measured as a contribution to the sales results of their parent company.
Do you think of leasing as a banking product or one that is aligned to banking? If not, how do you define and place leasing in the services sector?
Most interviewees identified leasing as an independent product and not part of banking. It is a financial solution offered by independents because “even the banks separated leasing from banking products by creating separate subsidiaries for the leasing activities.” Post the financial crisis the “patina of credibility provided by bank ownership” has evaporated and leasing is considered to be an independent product and that “growth is in the vendor/captive space.”
Do you see any differences in age groups embracing the “paying for services by subscription” philosophy?
A few interviewees thought that age was a factor. One said “the younger population is for usage rather than buying assets...because if it’s okay to rent a house it’s okay to rent a car… there is more awareness [of leasing] and it is becoming a more popular product. People are still buying but acting as renters. They want to change things in 13 months and don’t want the penalties associated with an operating lease.”
Another explanation of the generational change was experience of “IT and comms experience and usage.”
What is your estimate of the size of the market you operate in?
Few of the interviewees attempted to estimate the size of their market but of course understood their current volumes. Some emphasised the specialist nature of their product and business but did not seem to know the total market potential. None attempted to define their market, preferring to emphasise the ‘niche’ in which they operate.
Is your business regulated? Based on these responses not all companies understand the idea of regulation. Some confused ‘regulation’ with ‘code of conduct’, and named the Financial Conduct Authority, Office of Fair Trading, Finance & Leasing Authorty Code, British Bankers Association Code, and Financial Services Authority, as regulators.
Is your business represented by a recognised trade body?
Answers here confused regulation with representation. UK-based interviewees said that the Finance & Leasing Association (FLA) was their trade body, although many have dual membership across Europe. Other answers included were the Captives Forum, International Powered Access Federation, National Association of Commercial Finance Brokers, British Vehicle Rental and Leasing Association, Leaseurope and The National Outsourcing Association.
Do you have a view about the effect of new accounting rules on leasing within your business?
Many interviewees had no view. A number didn’t care about the changes. A minority were against change especially in terms of compliance costs since “it would seem every change introduced by government has imposed more stringent customer-reporting and tax regimes...the newer accounting will generally mean less positive news for business.”
Many did not appear to know what effect the changes would have on their business and that “discussions have been going on for years and the business continues to grow, we’ll deal with whatever emerges as and when it is decided.” Others were unclear about impacts on customer behaviour and questioned “whether the new rules would for example make hire purchase or finance leases a more attractive option for customers relative to operating leases” or whether “the new accounting rules will have a massive effect.”
Do you think that off balance sheet financing has a place in the financing of corporate business?
Most interviewees agreed. Some thought that contract hire was off balance sheet and would help with SME gearing, some felt that on/off balance sheet treatment should be linked to the risk and reward of the lender - the greater the risk the more it should be on the borrowers’ balance sheet and that “larger companies use products such as rental or contract hire for operational reasons”.
Derek Soper stressed: “Although the next phase of the study will explore this in depth, we believe that current statistics seriously under-represent the size of the industry. That's because there are many organisations whose activities do not appear in current statistics, including extremely large organisations whose products are in fact leasing but are rarely called ‘leases’. We think that it's time to redeﬁne leasing to include what are, in reality, leases”.
He added: “What we heard in these interviews was that services are frequently added to, and are part of a leasing contract, and that that this trend is increasing. There is recognition that the financial services landscape is changing and what we thought of as ‘equipment’ now includes services, and frequently, shared infrastructure.”