AFC Debate: Time to reset the intermediary model in auto & asset finance?

This year’s AFC summer conference, held as the keenly-awaited Supreme Court ruling cast a long shadow over discussions, saw two teams of experts argued the pros and cons of an industry transformation in the wake of the tumultuous legal and regulatory challenges of the previous twelve months.  In the words of debate chair Tom Speller, head of Connected Services at Shoosmiths, AFC’s legal advisors, “what we are looking at is a fundamental reset versus maintaining the existing system and adapting, evolving and iterating it.”

Speller introduced what he called the industry’s “gladiators”, ready to do battle for both the asset finance sector (John Rees and Christian Roelofs) and the auto finance sector (David Betteley and Wayne Gibbard).

An initial delegates’ poll via the AFC app designed to test the temperature around the debate’s central motion found 31% of voters from the auto finance sector agreed a fundamental industry re-set is required, compared with just 19% of asset finance sector voters.

What is a reset?

First up and fighting in favour of the motion, was John Rees, AFC’s community head for equipment finance, who began by defining “reset” as “not throwing everything out of the window” but rather as something akin to restarting a PC and not “the complete destruction of everything we’ve got at the moment.”

Recalling his acronym from past debates – PETTS – Rees began by focusing on “people and profits”, emphasising the need to bring new people into the industry who, with training, would “make this brilliant industry even better.”

“And on profits, there are lots of conversations about how the industry has allowed itself to become less profitable, with badly trained salesforces selling on volume, so that margins are too low to get a return. The asset finance industry needs to reset its thoughts on profitability,” Rees declared.

Next he moved on to “E” for environment, pointing to the huge opportunities for the asset finance sector to fund the ongoing energy transition, as well as much wider considerations around the whole lending environment, pointing to examples of consumers applying online, being rejected and never returning.

“We need to make sure that we price for risk not just risk-adverse – there’s plenty going for low value low risk deals, but we are an innovative, dynamic industry that needs to correctly accept risk and price accordingly,” Rees said.

Turning to “T”, Rees argued for better use of technology to complement what people are already doing, suggesting that “totally digital-only transactions” are in practice rare and unlikely to promote customer loyalty in a way that matches the industry ‘s reputation as a relationship finance partner. Finally, “S” stands for service with a focus on better customer experiences a longstanding aim.

Summing up his argument Rees said: “It’s all about service so if our industry can bring back people and profit, manage the environment we work in correctly, use technology to its gain not its hindrance, and bring service to its customers, it will reset itself and be a in a great position.”

Appropriate response

“That’s not an asset finance-created problem – so why do we need a reset? The driver is bank regulation and capital requirements, along with the need for more education and marketing around what the sector can offer. If you look at the stats, asset finance is actually growing – one of the few areas of SME finance that is,” he pointed out.

Using the example of the factory reset button on a smartphone, Roelofs maintained that even if a better model is available, or the battery life is poor, most users accept that the phone does more or less what they need.

“That phone is your life. Would you hit the reset button and risk losing all your contacts and everything you’ve built up?  No, you’d do any number of things before a reset was appropriate, and that is most definitely the case for the asset finance industry,” he concluded.

GROW

With the aim of ensuring the auto finance market remains “competitive, vibrant and accessible for all customers”, Gibbard said it was important to consider the industry’s stakeholders.

The first is government which is already indicating an appetite for reform of regulations in areas such as the Consumer Credit Act, which will drive auto finance to a fundamental reset. Similarly, the statutory regulators are also demanding change with the industry under scrutiny like never before, as evidenced by recent legal challenges and increased data collection requirements.

“But we should be proactive and helping regulators understand more about how we add value to the UK and how we help our customers, for example by providing a car so they can get to work,” Gibbard explained.

Thirdly, there is the question of oversight which has been brought to the fore by the advent of Consumer Duty which calls for a fundamental shift in culture, and prompting what Gibbard labelled as a call to action.

Finally, Gibbard highlighted the need to “widen” opportunity, with auto finance offering new products, innovations and technology advances which expand its reach and allow customers to access products more easily and comprehend some of the complexity of auto finance.

“I see this as driven change which we should embrace with a reset and so grow,” he concluded.

Regulatory reset

Countering this enthusiasm for a reset David Betteley, AFC community head for auto finance, cautioned that such a step was not necessary and would prove to be “really, really harmful – it’s like pressing the panic button, which is not rational”.

Instead, Betteley highlighted two reasons why he feels the market is adapting effectively and existing mechanisms are coping with the current round of challenges.

“First of all there is very significant competition in the market and that reflects the changing requirements of customers – no one lender or intermediary has market dominance. And secondly the market is made up of responsible lenders and intermediaries who follow the rules to the letter,” Betteley pointed out.

However, the Financial Conduct Authority (FCA) as the key regulator has, in his words, “been second guessed by the courts and the Financial Ombudsman Service” and so it is the regulator which is in need of a reset.  In contrast, to reset the industry would “disrupt innovation, erode confidence and risk economic instability.”

Betteley painted a picture of the wider auto industry under pressure from EV transitions, supply chain issues and dwindling customer demand, but pointed out that market correction was happening naturally as demand stabilised and supply chain challenges were resolved.  While the auto market was strained, it was showing itself to be adapting through innovation and not broken beyond repair.

“Resets crush innovation. Let the industry evolve through competition and not coercion – carrots always work better than sticks. Those calling for a reset have conceded that could include large scale government intervention, speculating on the outcome of the Supreme Court hearing, which could lead to unintended consequences like smaller firms moving out of the industry and reducing customer choice.

“But look what happened after the earlier Court of Appeal judgment.  The industry self-corrected.  There was a weekend of hiatus while firms reviewed their processes, but lending resumed and now firms have commenced data cleansing and other preparation for any redress scheme.  That took a matter of weeks, not years.  All we need is a little bit of patience.  

“A reset would unfairly punish those firms who followed regulations. If we demand a reset every time something changes, then we are effectively saying we don’t believe in resilience,” Betteley concluded.

Result

After more than 30 minutes of impassioned debate, a second delegate poll found the dial had shifted in favour of an industry reset.  In the final vote, 34% of auto finance voters favoured a reset, up from 31% at the start of the session, as did 24% of asset finance voters, up from 19%, giving victory to Rees and Gibbard who both made the case for the motion. 

Watch the ‘AFC Annual Debate’ in full here.