Regulated and unregulated leasing business

It may not occur to everyone in the UK finance and leasing industry what a privileged position they are in compared with most of their European counterparts. The UK market has a turnover of billions of pounds, has a customer base of millions including both individuals and corporates, yet has been subjected to limited government regulation over its finance activity.

Those organisations who are part of banks are, of course, already aware of the requirement for Bank of England reporting. Equally, organisations selling insurance alongside their finance products have just begun to feel the effects of FSA regulation either directly, or as a reaction from their dealer network. Dealers have been faced with the difficult and often confusing decision of how to sell insurance. It has been possible for them to sell insurance:

• On a commission only basis
• Directly regulated by the FSA
• As the agent of a finance company regulated by the FSA

The only other alternative has been to cease offering insurance products at all.

While enterprising organisations such as Carlyle Finance (as those of you who attended Leasing Life’s insurance seminar will know) have provided assistance for a number of dealer groups, others have had to contend with a process which included provisional registration with the GISC, the decision on the basis of business outlined above, then an ongoing reporting burden which includes corporate information outside the insurance activity itself.

This has been a disruptive and potentially expensive episode. Few people in the industry, however, could realistically think that it will be the last they see of new regulation. The lesson from other European countries such as Germany, France and Spain is that a significant amount of Central Bank reporting, or in the case of the UK perhaps FSA reporting, will be demanded. The reporting requirement varies from country to country but it is usual to see analyses of activity and balance sheet as well as corporate data such as the number of employees. Common examples include:

• Analysis of activity by financial product
• Effective interest rates
• Exposure by customer type
• Geographic analysis of business

On the sales side, deployment of the sales force is also much more strictly governed than may currently be the case. Training usually needs to follow prescribed standards and qualification for sales personnel may be required. All these requirements, needless to say, incur costs.

In the future it would be surprising if the finance and leasing industry maintained its charmed life vis-à-vis direct regulation. Whether or not there is an instance of bad practice which triggers it, FSA regulation is likely to be with us sooner rather than later.

In the past it has been possible for the industry itself to manage problems in the way it does business. In the late 1980’s and early 1990’s, for example, there were issues within the vendor finance sector caused by unscrupulous salesman who were encouraged to oversell at the end of the 1980’s boom. Too many of them adopted questionable selling practices such as using (very) small print in contracts to sell seven year finance contracts on photocopiers and other office equipment with a much shorter useful life. When this emerged, often when the finance company itself had begun to suffer extensive bad debt losses, the industry itself created a code of practice, which has been reasonably successful since. The shift in the regulatory climate since the 1990’s, however, makes internal solutions less likely.

What can we do to pre-empt full regulation? Given that the focus will fall on sales practice and reporting, well prepared companies will be seeking to document their sales training policies and procedures, with a view to certification of the sales force as qualified representatives of the organisation.

In the case of reporting, all companies have a reporting suite, but the existing process may be insufficient in the new regulatory climate. It is worth looking at European finance and leasing companies, or perhaps UK banking or insurance companies, to assess the type of reports which will be required. Some consultancy companies can also provide examples! If the data required is not available then information channels need to be opened. If the reporting mechanism is too cumbersome or labour-intensive this may be the point that a replacement system is sought.

Not for the first time, we would advise that inactivity is not usually the best option.

Author

The Richmond Consulting Group, is a premier business consultancy specialising in the provision of wide-ranging services to European leasing companies and lessees including systems, accounting, operations, risk management and HR assistance.

RCG uses its detailed knowledge of business, legal and accounting requirements in each European country to support national and international clients improving their business operations.