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  • End of lease care attracts new regulatory attention Posted on 14 November 2017

    Three recent policy developments have a common theme. Regulatory bodies have looked at what happens at the end of an equipment or vehicle lease. They seem to have reached broadly similar conclusions.

    Yesterday, the Financial Conduct Authority (FCA) issued its annual consultation on fees. In response to input from asset finance funders, the FCA asks whether it’s right that offering regulated hire agreements that have no purchase option is costlier for FCA fees than offering hire purchase agreements. The FCA is asking whether its current approach results in inconsistent treatment of similar agreements, and whether adjustments are needed to their fee structure to achieve a fairer distribution of the costs of the regulatory system.

    IFRS 16, the new international lease accounting standard from the International Accounting Standards Board, was finally endorsed for use in Europe last Thursday. Listed companies and other IFRS-users across Europe have until January 2019 to implement it. The key change is that all leases, including today’s operating leases, follow the same rules and go onto the lessee’s balance sheet (although in direct contradiction, for lessors the existing split between the two types continues - don’t ask why!). Under IFRS 16, where there is as purchase option, the lessee only adjusts its reporting only where this is “reasonably certain” to be used.

    Across to Luxembourg, and last month the Court of Justice of the European Union (CJEU), released its judgment on the VAT treatment of a Mercedes-Benz Financial Services product, Agility. Agility includes a purchase option, but not a bargain purchase. HMRC had argued that the purchase option means there must be a supply of goods. The CJEU took the opposite view, on the basis that ‘in the normal course of events’ the ownership will not transfer, so Agility should be seen as a hire arrangement and as such treated as a supply of services for VAT purposes.

    So, three entirely separate developments, but in all of them the message is the same: All leases are rental arrangements, that may or may not be followed by a transfer of ownership. Agreements with different names may have more in common than it first appears, but it's also important to identify where they are materially different.

    The implications stretch still further into other current regulatory developments.

    • For the FCA’s ongoing review of car finance, including Personal Contract Purchase, a key question already raised by the regulator is whether consumers understand the terms of their agreement. The market has already responded with far clearer explanations of what happens at the end of the hire period. The FCA seems likely to suggest lenders go a step further by showing customers the cost of the hire both with and without the PCP purchase option.
       
    • Another FCA development recently announced is a pending consultation on extending the scope of the Financial Ombudsman Service to encompass all SME lending. Regulated firms are already required to follow the FCA’s Principles for Business, such as the need to conduct their business with integrity, across all their activities. A wider role for the FOS could still increase firms’ record-keeping challenges. Firms might need to collect more evidence that all small business customers fully understood what would happen at the end of the initial lease period when they entered the agreement, including any unavoidable costs outside of the rental payments during the minimum term and any secondary period.
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