Stephen Sklaroff augments a previous AFI article highlighting the regulatory challenges being faced by asset and auto lenders post-lockdown.
David Betteley’s article raises some very good points about the challenges facing the industry during the 2008-9 financial crisis, how they were overcome, and the implications for our current situation.
I well remember working with David to help the industry through the 2008-9 crisis, including intensive discussions with the government and regulators. David rightly points out that the industry eventually emerged with an enhanced reputation for helping customers. Even the regulators saw us as the Good Guys. As I said at the IAFN conference on 5 May, I see no reason why that can’t happen again.
I also agree that we have some advantages this time. Although the serious recent squeeze on demand and supply has produced a significant drop in GDP, the UK economy was in pretty good shape before the crisis. Historically low levels of unemployment and inflation gave the Government room for a massive fiscal and regulatory intervention to cushion the economy while (we all hope) avoiding some of the usual inflationary side-effects.
Meanwhile, business continuity planning is probably better now than at any time in the industry’s history. Companies have quickly redeployed staff from front-line sales to deal with forbearance requests, and have put in place working-from-home arrangements unimaginable ten years ago. As David points out, there are also reasons to think the impact of the current crisis on RV values, at least in the short term, may not be so bad as feared. More generally, I expect that pent-up demand for a more normal motoring life will outweigh the trend towards bicycles and Shanks’s pony.
Having faced previous crises
To take a broader view, anyone my age has lived through many different crises: some existential like the Cuban missile crisis; some involving loss of life like the 1968 global flu pandemic (80,000 UK deaths); some with major adverse economic effects like the three-day week in the 1970s and the 2008-9 financial crisis. The point is not that all these crises were similar, or that the one we currently face is not serious, but that there are useful lessons to be learned.
One is that they were all survivable. Life – and the markets – went on, often less profoundly changed than people expected. Second, and while it may be a cliché, every crisis is also an opportunity. This time, we have the chance to move even faster away from an economy reliant on paying to own things and towards one which makes it easy to pay to use things. The circular economy (based on asset finance, leasing and rental of various kinds) may well prove to be the “new economy” which government ministers have been talking about. But to get the right kind of economic growth means having the right economic and regulatory environment. And that requires action now, to ensure that conditions allow a rapid recovery post-COVID.
Let’s think about those actions.
First, when bank funding for non-bank lenders dried up along with the securitisation markets in 2008-9, the industry quickly became good at seeking and finding alternatives (even if the terms were tough and everything had to be renegotiated every few weeks). As a result, the “reasonable worst case” scenarios for FLA members on which David and I worked proved, thankfully, to be over-pessimistic. In the end, very few FLA members went out of business.
But – maybe partly because of that success – the structural imbalances in Government support for lenders in 2009 (including the long-established rules restricting to bank lenders any Bank of England support) were not fully addressed.
The Government’s response to industry pressure was to create new mechanisms – like the British Business Bank’s current CBILS scheme – through which lending from non-banks could be supported. But as we said at the time (and I have no doubt the FLA is saying now) these additional schemes – however useful in themselves – are no substitute for a more direct pipeline of money from the Bank of England. This needs to be resolved.
Second, as David says, we need radical reform of the current rules for conduct of business in the consumer finance markets. This did not happen after the 2008-9 crisis. Although the Government elected in 2010 initiated a wholesale restructure of prudential and conduct of business regulation for financial services, this omitted any substantive change to the 1974 Consumer Credit Act. Ministers privately admitted to me at the time that they were aware of this, but had run out of time (on a timetable of their own making) to get the necessary legislation ready.
New regulator on the block
The consequence was a new, expensive, interventionist, and powerful conduct regulator – the Financial Conduct Authority – with draconian sanctions at its disposal, which nonetheless found itself enforcing consumer credit rules conceived by the Crowther Committee in the late 1960s and enacted in the Consumer Credit Act of 1974. To say that the UK’s credit markets have changed in the half-century since then would be something of an understatement.
This has been obvious for many years, but the COVID19 lockdown has brought it into even sharper focus. There are three main problems with the current rules:
- They require lenders to communicate with customers as if the latter had no access to modern communications technology, and in some cases as if agreed forbearance arrangements had not been made. David’s example of the “Modifying Agreements” sits here.
- They give different customers different levels of consumer protection depending on the type of credit agreement they take out, meaning that a customer may move from one to another while unwittingly losing significant protections (e.g. when moving from PCP-style car finance to PCH-type rental agreements).
- They assume that credit agreements involve a single customer, a single agreement, and a single good or service.
The first and second problems mean that it is much more difficult to serve customers well even with the existing suite of finance products. That’s bad enough. But the third means that the system actually gets in the way of new products designed for a servitised future, in which – for example – a “car” comprises several different pieces of equipment, each with its own depreciation curve and likely RV, and usage is shared between several different customers who want the flexibility to dip in and out of different arrangements with minimum cost.
If we really want to boost economic growth on our way out of lock-down, we need to facilitate new kinds of product which will allow customers the kind of flexibility they will want in future. While the FCA’s “regulatory sand-box” (allowing new ideas to be tested with some degree of regulatory cover) is fine for experimentation on a company-by-company basis, fixing the broader, market-wide issues will require not just regulatory forbearance, but a change in the rules, including those set out in legislation.
As lock-down begins to loosen here and overseas, the window of opportunity will close fast. Change is urgent. We need to do everything we can to help the industry’s representatives, including the FLA, persuade the Government to make it happen.
Stephen Sklaroff is the ex-Director General of the Finance & Leasing Association