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  • How will Brexit affect leasing and how should we prepare? Posted on 26 June 2016

    It’s useful to consider three factors before predicting the effects of Brexit on the UK leasing industry.

    First, although we can always find something positive in the latest industry statistics, leasing is a stable and mature industry. At the end of the 1980s, new business was around £12 billion per year, which is £29 billion in today’s prices according to the Bank of England’s online inflation calculator; at the end of the 1990s it was around £18 billion, or £28 billion in today’s prices; and last year it was £29 billion. Within these figures there has been a shift away from big-ticket business, so SME volumes have increased. However strong growth in recent years has been mostly about recovery to normal business levels, and we are about there.  Even before Brexit, the signs were that growth levels would tail off.

    Second, UK leasing tends to follow the performance of the US industry and often within a few months. The Equipment Leasing and Finance Association's monthly index has been showing falling volumes in the past quarter, with year to date new business up to May down 9 percent compared to 2015.

    Third, UK leasing is a leading indicator of the wider UK economy, even more so than general business investment which is dominated by larger firms. Whatever the long-term outlook, Brexit creates great uncertainty for UK SMEs in the short to medium-term. One of the first ways that uncertainty could be seen is through lower volumes of new leasing.  

    Take these factors together, and it doesn’t seem to be particularly contentious to forecast that leasing volumes will fall - and may fall quickly -  over the next year.

    The leasing industry has been through difficult periods before and most firms can be expected to make it through.  There are, however, some factors that could make this period of uncertainty quite tricky to manage:

    > The market has become noticeably more diverse and competitive in recent years, with several private-equity backed new entrants still in their early stages, and at least one challenger bank about to launch its operations. 

    > Competitive forces combined with Bank of England funding has led to rock-bottom rates in parts of the market.

    > Low defaults and a lack of major fraud cases could have led to some relatively lax lending policies here and there.

    > There are several major uncertainties over regulation, including the implementation of IFRS 16, the knock-on effects of the new accounting rules on leasing taxation, the pending review of salary sacrifice and possible changes to VAT. Brexit might put some of these on hold or lead to them being scrapped, but until we know they could further dampen demand. 

    In summary we are likely to face a period of falling demand at a time when some lessors might be more exposed to market forces than was the case in 2008.

    Firms will no doubt already be planning their own responses but some of the potentially most effective ways to deal with Brexit rely on collaboration with other lessors:

    1. Improve default data: Unlike several other major leasing markets including the USA and Canada, there is still minimal information available on defaults and losses on leasing deals by parameters such as sector, size of deal, equipment type and region. The need for this data, and its value, is greatest during more difficult trading conditions. Without the data, lending is unnecessarily risky and it is difficult for lessors to attract external non-bank investment. Putting in place data sharing arrangements similar to those that are now proven to be indispensable in other countries could happen within a year, but it first needs the support of a range of firms. 

    2. Support intermediaries: Around 40% of the market by value, and probably nearer 60% by number of agreements, is reliant on broker or vendor introductions. It’s becoming harder than ever to attract new intermediaries because of the bureaucracy of the FCA consumer credit regulation, even though only a small proportion of agreements are regulated. As an industry we need to show both current and potential intermediaries that that the regulation is generally straightforward, and give them industry-standard tools and guidance so they can be compliant without having to jump through any extra hoops.

    3. Share more fraud intelligence:  To help avoid higher fraud, cooperation between lessors to share the latest tip-offs is essential. The tool to enable such information sharing in a legally safe and secure way is in place. It deserves the support and active participation of the entire industry.

    4. Get closer to Europe: The need for strong alliances with other lessors across Europe is likely to be greater than ever. The annual Leaseurope Convention, this year in Athens on 6 and 7 October, is attended by several hundred senior executives from across Europe. www.annual-convention.eu

    5. Promote the leasing industry: Other parts of the financial sector are far more active in promoting themselves. It’s not enough to promote leasing as a product, it’s also vital to explain who provides it. Asset Finance Policy aims to play its part through the Asset Finance 50 lessor ranking survey (via assetfinanceeurope.com) and the Asset Finance 500 broker directory (www.assetfinance500.uk). The first edition of our comprehensive new guide to the industry will be published in September. 

    It seems more than likely the leasing industry faces another difficult period ahead, but with careful planning and collaboration between firms the industry could emerge stronger and better equipped to help UK businesses than ever before.

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