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  • Archive of policy updates to June 2015 Posted on 23 June 2015

    CMA publishes new insights into asset finance market (21 May 2015)

    As part of its ongoing investigation into the retail banking market, the Competition and Markets Authority (CMA) has today published various new statistics on the asset finance market, which appear to show that the largest banks account for less of the SME market than we might have expected. The CMA say that the top four banks account for "over 60%" of the SME leasing market and the  Herfindahl-Hirschman Index (HHI) for the asset finance market is 1552. The HHI is calculated by summing the squares of the market shares of participants. This value might be obtained for example if the largest firm had a market share of 30%, the next 20%, and then all the rest under 10%. The figures also show that approximately 70% of banks' asset finance product sales are to business current account holders but only a very small (and indeed declining) proportion of business current account holders have taken out asset finance with the same provider (the graph suggests just 1 in 200). The CMA concludes that the asset finance market appears to be less concentrated than the markets for business current accounts and general loans. The CMA's updated Issues Statement today indicates that the Authority will now consider asset finance as a separate market to business current accounts, reducing the chance of the CMA imposing remedies that have a direct impact. 

    FCA consults on product "add-ons" (27 March 2015)

    The Financial Conduct Authority's (FCA) new consultation CP15/13, issued on Wednesday, clarifies the FCA's views on 'add-on' products such as the insurance-type products sold alongside asset finance. The FCA proposes to change the Conduct of Business Sourcebook (COBS) to say that "A firm must not enter into an agreement with a client under which a charge is, or may become, payable for an optional additional product unless the client has actively elected to obtain that specific product." The ramifications for asset finance appear significant. Where currently lessees are asked to provide details of their equipment insurance and if not provided a policy is automatically started for them, first impressions of the new rules are that this practice will have to stop. Tighter regulation of insurance add-ons has been expected for some time. However it is noticeable that these new proposals appear wider-ranging than expected, limited neither to consumer credit (so could affect all business of FCA regulated firms) or to insurance (therefore an argument that the product is a service rather than insurance appears not to work). 

     New anti-avoidance measures on Hire Purchase capital allowances (27 February 2015)

    HM Revenue and Customs has issued draft legislation, taking immediate effect for tax purposes, which prevents firms from claiming capital allowances on an item of plant and machinery it has acquired if it hasn't paid an 'open market' price for the item. The measure is in response to proposed sale and leaseback arrangements that could have created substantial capital allowances on assets that had previously entitled their owners to no allowances. Tax schemes designed by firms of accountants and others must now be notified to HMRC. This allows the authorities to close possible loopholes in the legislation where necessary, protecting the Exchequer from loss of tax but adding further extra complexity to the capital allowances rules for genuine transactions.

    More pressure on rolling stock leasing arrangements (27 January 2015)

    The House of Commons' Transport Committee's new report, Investing in the railway, pulls no punches in its critique of the current arrangements for leasing rolling stock. Citing a recent transfer of rolling stock between two operators, it refer to a "fundamental weakness in the way rolling stock is leased and managed". The report sets out both the average age of leased trains (19 years for Angel, around 19 years for Eversholt, 17 years for Porterbrook) and the oldest leased trains (29 years for Angel, 40+ years for Eversholt and 40 years for Porterbrook). These may seem old, but the report quotes Paul Francis, Managing Director of Porterbrook, who told the Committee the UK has "one of the youngest train fleets in Europe". The Department for Transport must ensure there is sufficient operating stock to operate existing services as well as newly electrified lines, the Committee concluded.

    Merger of financial sector trade associations mooted (22 January 2015)

    The Finance & Leasing Association and the Asset Based Finance Association are among nine financial sector trade associations that could be merged into a new single body, according to recent press reports. The suggestion has come from a working group of large banks. The banks appear to want to strengthen their lobbying, reduce overlap and save money on subscriptions. The larger associations involved include the British Bankers' Association, the Council of Mortgage Lenders, the Payments Council and the UK Cards Association. The ideas are being consulted on with a final recommendation due in May, it is reported.

    Trade association merger proposals have come and gone before, but this initiative does seem to have some strong backing at the top of the banks. Whilst the case for change can be debated, such a merger seems bound to give the large banks more control of how the sector is represented. In the United States, the National Equipment Finance Association serves "value conscious" small- to mid-size independent equipment finance companies, both lessors and brokers together with service providers. If the proposed consolidation was to go ahead, a need could emerge for a UK equivalent of NEFA for the asset and asset-based lending sectors.

    Office of Rail Regulation seeks views and information on the operation of the Rolling Stock Leasing Market Investigation Order 2009 (4 January 2015)

    Five years on from the the Competition Commission's investigation into the train rolling stock leasing market, the railways regulator is now consulting on the effectiveness of the Order put in place following the case and the Railway Stock Operating Companies' (ROSCOs) compliance with it. The Order itself is fairly unexciting, covering changes to the ROSCOs's Code of Conduct on how they deal with train operating companies (the Code itself having been the result of a previous Government initiative) and measures to increase the comparability of competing lease proposals for used rolling stock. Perhaps of more potential importance, the ORR is also seeking views on any important changes that have taken place since the Order came into force in February 2010.

    Basel Committee consults on changes to capital requirements rules  (23 December 2014)

    The Basel Committee on Banking Supervision has published a consultation on proposals for changes to the standardised approach for credit risk. Under the proposals, banks using this approach (rather than the more sophisticated and data-intensive internal ratings approach) will be required to reduce their reliance on external credit ratings and instead rate the risk of lending on borrowers' revenue and leverage, on the basis that corporates with higher revenue and lower leverage have the lowest risk of default. Higher risk weightings will apply to specialised finance which is seen as having higher risks and losses than other types of corporate lending. This includes 'object finance' such as planes, trains and ships. It seems it will be important to keep non big-ticket leasing out of this 'object finance' category.

    Autumn Statement (4 December 2014)The Government's blind faith in the ability of the Peer to Peer (P2P) sector and other so-called 'alternative' forms of lending to boost SME lending was confirmed in yesterday's Autumn Statement.

    We had the Chancellor's tax raid on the banks, restricting their ability to use their tax losses. This won't encourage banks to provide more operating leases. According to David Gauke MP, Exchequer Secretary to the Treasury "a competitive tax system needs stability, certainty and simplicity". This announcement failed at least the first two of those tests.

    Then a raft of measures to support the 'alternative' providers. A new bad debt relief for lending through P2P platforms; a consultation on whether to extend ISA eligibility to lenders using crowd funded, debt-based securities; removing regulatory barriers for P2P lending; bad debt relief on investments made through P2P lending; yet another big initiative to get details of alternative sources of finance to SME; confirmation of the Government's support for a central UK credit register; and the publication of a list of nine banks that will be required to share SME credit data with other lenders through credit reference agencies.   

    It's possible that asset finance firms could be seen as 'alternative' providers but some real work is needed to ensure that these measures are actually of any practical benefit to the leasing industry, because the P2P sector really has got its act together in campaigning for its own interests. It's clear that 'alternative' is increasingly meaning P2P / crowd-funding.

    There were also some snippets of good news for leasing: The extension of the Funding for Lending scheme, in which a number of the small and mid-size banks with leasing interests participate (and good to see specific mention of asset finance in the Bank of England's release yesterday); and an extension of the British Business Bank schemes.  

    FCA moves the goalposts for brokers (2 December 2014)

    The FCA announced revisions to the Consumer Credit Sourcebook yesterday that take effect 2 January 2015. They are likely to require extra disclosures when a broker has its own-book, so the customer is kept informed of who will provide the finance. There's also a need now to disclose the legal name of the firm, not only a trading name. Neither change is likely to be problematic but it's a concern that the FCA can still produce policy documents that make no reference at all to the business finance market. Further changes will be announced in January, the FCA said.

    British Business Bank (BBB) launches ENABLE programme, asset finance funding vehicle (24 November 2014)

    Some details of this long-awaited new scheme from the Government's Business Bank were published on 17 November.  Proposals are now open and will be considered on a 'first come first served' basis. The scheme may be of interest to asset finance companies that:

    a)   Have own-book SME lending portfolios of approx. £25m (or at least plans to get there within 12 months) excluding operating leases

    b)   Wish to raise funding for additional lending to SMEs by selling their existing book

    c)   Accept need to retain a sizeable interest in the book being sold on first-loss basis.

    The big unknown here is what the implicit rate will be when the portfolios are sold. Perhaps it will sit somewhere between cost of block and existing private sector investment. For now however it makes sense for funders fitting the above criteria to express interest and start discussions with the BBB.

    Competition and Markets Authority (CMA) launches retail banking market investigation (6 November 2014)

    As expected, the CMA has launched an 18 to 24-month review of the retail banking market, including SME lending. Significantly, the terms of reference include all lending products. Some banks had argued that the terms should be restricted to core lending products. The scope decision is based on the CMA's concern that linkages between SME current accounts and other lending products could restrict, prevent or distort competition. In parallel to the new market investigation, the CMA will review existing requirements for banks to avoid restricting access to loan products to holders of current accounts. The degree of emphasis on the possible anti-competitive effects of linkages between products in the CMA's decision to launch the investigation is striking. It is an early indication that some form of forced separation of banks' non-core lending products could be required in due course. Asset Finance Policy has strong experience of CMA (previously Competition Commission) market investigations and would be pleased to discuss this further.  

    Help to match SMEs rejected for finance with alternative lenders (23 August 2014)

    HM Treasury and the Department for Business have jointly published feedback following their consultation on whether the Government should legislate to require banks to refer small businesses they have rejected for finance to other lenders. Inevitably the plans to legislate are going ahead. Banks will be required to provide basic details of businesses being referred, including how long the business has been trading (other plans to allow lenders access to  current account data for small businesses are also still on the table). There must be simpler ways of ensuring that small businesses consider the use of alternative lenders than this clunky new legislation.   

    Growing a circular economy: The role of leasing (30 July 2014)

    A report from the House of Commons Environmental Audit Committee, Growing a circular economy: Ending the throwaway society, published on 24 July notes the case for service and lease-based models to make more efficient use of resources. The Committee make a wide range of recommendations around the need to support efforts to improve resource efficiency.

     Would proposed changes to insolvency rules increase risks to IT lessors? (9 July 2014)

    The Insolvency Service is consulting over on a possible extension to 'Continuity of supply' rules that apply when a business enters insolvency. Currently utilities (e.g. gas and electric) providers must continue serving insolvent businesses with no change of terms. It is proposed to extend the rules to include IT suppliers - with possible implications for leased IT equipment. Lessors are generally content to leave equipment in place during an insolvency but need negotiating power to ensure the equipment remains insured and maintained and that they are consulted over the resolution arrangements. The consultation closes 8 October.

    Asset finance for renewables scheme wins Green Investment Bank support (8 July 2014)

    The Government's Green Investment Bank (GIB) has made its first investment in leasing of small renewable energy technologies such as biomass boilers or ground source heat pumps. Specialist asset finance provider Reenergise Finance has raised £1million from the the GIB and its fund manager Sustainable Development Capital LLP,  matched by £1m from a private equity fund. The scale may be modest but it could help to promote further investment in the nascent small-ticket renewables leasing market.  

    Regional Growth Fund (Round 6) open to bidders (2 July 2014)

    The Government is inviting bids for £200 million of further support for economic growth, investment and jobs through its Regional Growth Fund (RGF). Six lessors have already successfully bid in previous rounds, using the RGF support to reduce the cost of new equipment for eligible small businesses. Successful bidding is all about demonstrating "additionality" (i.e. supporting investments that otherwise wouldn't take place) whilst meeting the new European state aid rules that took effect on 1 July. Bids have to be submitted by 30 September.

    VAT relief for cars (and boats) adapted for wheelchair users (2 July 2014)

    HM Revenue and Customs (HMRC) is consulting over proposed changes to VAT tax breaks for cars and boats adapted for use by wheelchair users. This has been a long-standing issue for many car lessors in particular, as the rules on how the tax relief should be applied have been far from clear. Where they suspect abuse of the rules and the cars are being leased HMRC has tended to blame finance companies for not ensuring car dealers carry out proper checks. However the nature of the checks required by HMRC has never been clear. For example, dealers can't insist on seeing a certificate from a doctor. With only very minor adaptations being required (such as a steering wheel knob that takes five minutes to fit) the consultation suggests a level of abuse of the scheme running into thousands of cars per year. A wide range of options are on the table, including limiting the relief to more substantial adaptations and limiting the number of cars that a wheelchair user can purchase. Many details will need to be worked through, including the practical impacts on lessors and their dealer partners, and most importantly how to ensure that those who need the tax support can continue to benefit from it. The consultation closes 19 September.

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