asset finance united kingdomdbdci2xaa31q7.cloudfront.net/images/pdf/wcg_uk_auto_and...keeping up...

ASSET FINANCE INTERNATIONAL

IN ASSOCIATION WITHWHITE CLARKE GROUP

ASSET & AUTO FINANCE COUNTRY SURVEY 2017

UnitedKingdom

United Kingdom Asset and Auto Finance Country Survey 2017

2


White Clarke GroupWhite Clarke Group is the market leader in software solutions and business consultancy to the automotive and asset finance sector for retail, fleet and wholesale. White Clarke Group solutions enable end-to-end credit processing and administration to streamline business practice, cut operational cost and deliver outstanding customer service. White Clarke Group has a 25-year track record of leadership and innovation in finance technology, consultancy and new market entry. Clients value White Clarke Group's industry knowledge, market intelligence and innovation. The company employs some 500 finance and technology professionals, with offices in the UK, USA, Canada, Australia, Austria, Germany, India, and China.

whiteclarkegroup.com

© Asset Finance International, 2017, All rights reserved. No part of this publication may be reproduced or used in any form or by any means–graphic; electronic; or mechanical, including photocopying, recording, taping or information storage and retrieval systems–without the written permission from the publishers.

http://www.assetfinanceinternational.com

Publisher: Edward Peck Editor: Brian Rogerson Author: Nigel Carn

Asset Finance International Ltd.

39 Manor WayLondon SE3 9XGUNITED KINGDOM

Telephone: +44 (0) 207 617 7830

http://www.whiteclarkegroup.com


3


Acknowledgements

Rob Abrahams, Head of Market Development, carwow

Chris Bosworth, Director of Strategy, Close Brothers Motor Finance

Dean Bowkett, Managing Director, Bowkett Auto Consulting

Austin Collins, Managing Director, BuyaCar.co.uk

Adrian Dally, Head of Motor Finance, Finance & Leasing Association

Sébastien Duval, CEO, AUTOi

David Hosking, CEO, Tusker

Richard Jones, Managing Director, Black Horse

Gerry Keaney, Chief Executive, BVRLA

Alastair Kendrick, independent company car taxation consultant

Jon Lawes, Managing Director, Hitachi Capital Vehicle Solutions

Rupert Pontin, Director of Valuations, Glass’s

Kit Wisdom, Head of Technical Services, Alphabet GB Limited


4


Contents

Acknowledgements 3

Foreword: Brendan Gleeson, Group CEO, 6 White Clarke Group

The UK at a glance 7

The UK asset finance market 9

Momentum maintained in 2016 9

Market outlook: Adrian Dally, Head of Motor Finance 12 at the FLA

UK auto sector – the boom continues 13

Car finance growth 14

Market outlook: Chris Bosworth, Director of Strategy, 16 Close Brothers Motor Finance

Upward trajectory continues into 2017 17

Market outlook: Rob Abrahams, Head of Market 18 Development, carwow

Is there a debt bubble? 19

Market outlook: Dean Bowkett, Managing Director, 20 Bowkett Auto Consulting

The UK vehicle leasing market 22


5


Market outlook: Gerry Keaney, Chief Executive, BVRLA 24

Market outlook: Jon Lawes, Managing Director, 25 Hitachi Capital Vehicle Solutions

Used car market values 26

Market outlook: Rupert Pontin, Director of Valuations, 26 Glass’s

Market outlook: Sébastien Duval, CEO, AUTOi 27

Investment in UK vehicle production 28

Market outlook: Kit Wisdom, Head of Technical 29 Services, Alphabet GB Limited

Government initiatives 30

Market outlook: David Hosking, CEO, Tusker 31

Market outlook: Austin Collins, Managing Director of 32 BuyaCar.co.uk

Economic outlook 33

Growth forecasts 33

Business confidence indicators 34

P2B lending 35

Market outlook: Alastair Kendrick, independent 36 company car taxation consultant


6

Foreword

By Brendan Gleeson, Group CEO, White Clarke Group

Welcome to the 2017 survey of asset and auto finance in the UK. This is in fact the fifth such report on the state of the UK industry, produced by Asset Finance International in conjunction with White Clarke Group, and as previously, it aims to provide a wide-ranging and forward-looking assessment of the market, its current and future drivers and key industry issues.

The first and most encouraging point to note is that the asset and auto finance market not only continued to grow in 2016, in spite of fears of what might happen in the aftermath of the vote to leave the EU and wider concerns about the global situation, it has carried on growing into 2017 and shows little sign yet of slowing.

Nonetheless, there are genuine concerns about the potential effects of Brexit, even though the Article 50 starting pistol has only just been fired and the UK won’t be exiting the EU until 2019.

For this latest survey the focus is firmly on the auto sector, where the relationship between the UK and EU member countries is of the greatest importance and the Brexit negotiations will be most closely monitored. Tariff and barrier-free trade is critical to future UK automotive production post Brexit as the majority of components used in UK-built vehicles come from Europe.

Concerns expressed in the industry include the potential impact of Brexit on interest rates, currency exchange rates and the effect this could have on pricing and inflation. ‘Uncertainty’ remains the most overused word in the economic lexicon, but because of this fleet managers are delaying investment.

Consumer caution is likely to grow, and the view in the industry is that there will be a decline in new car sales, but that this will lead to greater opportunities in the used car market.

One outcome is that auto finance deals are expected to remain very competitive. Dealers need to ensure customers genuinely understand the benefits of finance. Keeping up with developments in finance technology is paramount.

There is a new look to this survey, as it contains a series of specially commissioned outlooks on the prospects for the auto sector, provided by experts from across the industry, each giving their own perspective and providing much thought-provoking content.

Brendan Gleeson


7

The UK at a glance This new White Clarke Group and Asset Finance International country survey aims to provide a balanced assessment of the latest developments in the auto and asset finance markets in the UK, with the focus this year on the auto sector and the outlook for the year ahead.

Key areas covered and principal findings include:

ƴ The UK asset finance market continued to grow in 2016, registering the sixth consecutive year of growth, with total new business in 2016 amounting to £30.2 billion ($38 billion).

ƴ At the end of the year the vehicle sector had consolidated its dominant share of the market, with car finance accounting for nearly one-third of the total provided by FLA members.

ƴ New car registrations reached a record high of close to 2.7 million in 2016, with the market once again being driven by consumers benefiting from low interest rate deals and continuing low fuel prices.

ƴ In 2016 the point of sale consumer car finance market grew 8% in volume to 2.3 million units and 12% in value to £31.6 billion.

ƴ Momentum has been maintained at the start of 2017, with a record high for UK new car registrations in January to reach the highest level since 2005.


8

ƴ With predictions of a decline in new car sales, the view in the industry is that used car sales should hold up well.

ƴ Lessors face the prospect of several challenges in the coming months, and many firms are delaying investment in their fleets until the implications of Brexit become clearer.

ƴ Tariff and barrier-free trade is critically important to future UK automotive production post Brexit.

ƴ The government’s aim is for the UK to be at the forefront of the transport technological revolution.

ƴ The collapse in the pound following the vote to leave the EU will push up import prices and consumer prices will follow.

ƴ A majority of small business owners are not confident about the UK’s economic outlook for 2017.

Throughout this report a select group of industry experts provide outlooks for the auto finance market from their particular perspective. These are:

ƴ Adrian Dally – Policy and regulation priorities

ƴ Chris Bosworth – Another year of innovation and improvement ahead

ƴ Rob Abrahams – Will market changes directly impact the current trends in consumer car buying behaviour?

ƴ Dean Bowkett – Residual values and used vehicle values – a bearish approach to Brexit

ƴ Gerry Keaney – 2017 set to be the busiest year in the BVRLA’s history

ƴ Jon Lawes – Fleet lessors need to keep pace with economic, political and technological challenges

ƴ Rupert Pontin – 2017: Insight and intelligence required to prosper in the year ahead

ƴ Sébastien Duval – The used car market comes into its own

ƴ Kit Wisdom – The connected car in 2017

ƴ David Hosking – Despite recent tax changes UK car benefit schemes are here to stay

ƴ Austin Collins – Potential growth areas in 2017

ƴ Alastair Kendrick – The changing face of taxation of the company car


9

The UK asset finance marketMuch time and space has been devoted since last June’s referendum on when the downside will be felt of the vote to leave the EU.

However, despite the misgivings, the headline economic data show no sign of a downturn and in fact most forecasts have recently been upgraded.

The most noticeable change has been the fall in sterling. On referendum day the exchange rate for the pound stood at $1.49; the next day it crashed to $1.37 and carried on down; six months later it was $1.23 and continues to languish around that level.

The potential benefits or drawbacks of such factors are yet to be seen. It should be remembered that two or three quarters is not a long time in economic terms, and that many areas of uncertainty remain for producers and consumers, as well as for lenders and borrowers.

This of course applies to the asset finance market.

Momentum maintained in 2016

The UK asset finance market continued to grow in 2016, contrary to the short-term warnings about confidence and investment falling away after the referendum. In fact, according to the Finance & Leasing Association (FLA) it clocked up its sixth consecutive year of growth, with total new business volume (NBV) in 2016 amounting to £30.2 billion ($38 billion at the year-end exchange rate).

It’s too early to call the start of a slowdown, but NBV in December 2016 fell by 13% compared with the same month the year before, and overall the year-on-year rate of growth of 5% in 2016 was not in the same league as the double-digit growth of the previous two years.


10

Asset finance NBV monthly running total, 2016

Source: FLA, Asset Finance International

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

20%

15%

10%

5%

0%

-5%

-10%

-15%

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

–

Monthly volume (£ million) Change on previous year (%)

Jul-1

6

Geraldine Kilkelly, head of research and chief economist at the FLA, comments:

“Despite a quiet December, asset finance new business reached £30 billion in 2016 as a whole, the highest annual total since 2008. Our latest industry confidence survey suggests a broadly stable outlook, with modest new business growth in 2017.”

Broken down by asset sector, there was notable growth in business equipment finance (+16% y-o-y) and a fair performance for commercial vehicle finance (+7%) and car finance (+4%). However, plant & machinery finance was stagnant and IT equipment finance retreated slightly (-1%).

Note that in the FLA figures given here, ‘Car finance’ signifies both fleet finance and cars financed via the point of sale through dealers; ‘Commercial vehicles’ includes light commercial vehicles, trucks and buses; ‘IT equipment’ signifies computer hardware and software; and ‘Business equipment’ signifies office equipment such as photocopiers, multifunctional devices, telecoms, vending machines, and medical equipment.

At the end of the year the vehicle sector had consolidated its dominance of the market, moving towards 60% share, with car finance accounting for nearly one-third of the total provided by FLA members.


11

Asset finance market share by sector, 2016 (%)

Source: FLA, Asset Finance International

Car finance

Commercial vehicle finance

Plant & machinery finance

Business equipment finance

IT equipment finance

Aircraft, ships & rolling stock finance

Other

20.2

25.4

8.3

7.8

32.0

4.71.6

At the end of the year the vehicle sector had consolidated its dominance of the market, moving towards 60% share, with car finance accounting for nearly one-third of the total provided by FLA members


12

MARKET OUTLOOK: Adrian Dally, Head of Motor Finance at the FLA

Policy and regulation priorities

With the parliamentary process which will lead to the triggering of Brexit negotiations underway, and a busy schedule of regulatory announcements expected from the Financial Conduct Authority (FCA), 2017 will be a very busy year.

By the end of January, the Finance & Leasing Association (FLA) had already seen the No 10 Policy Unit and the Treasury to continue discussions about the challenges and opportunities that Brexit may bring. One point of focus was the potential for future regulatory reform in areas like government support for business finance (in part constrained by current EU State Aid rules), and potentially customer-friendly changes to the many out-of-date provisions of the Consumer Credit Act.

The latter issue is of particular importance to the motor finance market, which now supports over 86% of private new car purchases. Customers in this sector increasingly check out deals on their mobile phones and compare cars on their tablets. But they would need to make between 80 and 150 swipes if they wanted to use the same technology to look at all the information about their finance agreement which is required by current regulation.

The motor finance market is also making a huge contribution to the government’s Industrial Strategy – a point we have emphasised to the government during recent meetings. The FLA’s motor finance members pay for the Specialist Automotive Finance (SAF) competence test, which assesses dealership staff’s knowledge of car finance and the regulations that govern its sale in showrooms. In addition, the FLA recently won government approval to develop a Motor Finance Specialist apprenticeship standard which should help to attract new entrants to a sector that increasingly offers career paths rather than just jobs.

In the regulatory sphere, our response to the FCA’s recent consultation on its future mission said that the FCA needs to rethink how it will communicate with the 35,000 consumer credit firms it has now authorised. The vast majority do not have designated supervisors to help them negotiate the FCA’s highly complex mix of principles, conduct rules, guidance, threshold conditions, approved person standards, and the plethora of additional requirements that make up the current regulatory framework for consumer credit. Since effective dialogue is a key requirement of good regulation, the FCA needs to find ways of communicating clearly with the credit markets on a day-to-day basis.

We have also suggested that it’s time to sort out the poor fit between the Consumer Credit Act (CCA) and the rest of the FCA’s powers. The Act can still render credit agreements unenforceable for very minor reasons. Nothing similar applies in the other markets regulated by the FCA. A more consistent and proportionate approach to supervision and redress should be a priority.

An FCA consultation paper on affordability and creditworthiness is expected soon, as is a report on staff remuneration. At some point the FCA will also report on its review of the CCA, while preparations will continue during 2017 to extend the FCA’s Senior Managers’ Regime (SMR) to the credit markets. We will be working to ensure that the SMR is rolled out on a proportionate basis, and will continue to stress to the FCA that a realistic time-frame will be required to allow firms to make the required changes.

Adrian Dally


13

UK auto sector – the boom continuesAccording to the UK Society of Motor Manufacturers and Traders (SMMT), new car registrations reached a record high of close to 2.7 million in 2016 – an increase on 2.3% on the previous year and the fifth consecutive year of growth.

The market was once again driven by consumers benefiting from low interest rate deals and continuing low fuel prices. However, the year-on-year growth momentum has slowed in recent years, and December 2016 was one of two months in the last year which experienced negative growth.

Carl D’Ammassa

UK new car registrations, 2011-16

Source: SMMT

In terms of fuel use, registrations of petrol-driven cars rose significantly more than for diesel, giving petrol a near 50% market share. Meanwhile, alternatively fuelled vehicles continued to grow impressively and should soon break the 100,000 new registrations barrier.

Greatest growth was in the fleet segment, up by nearly 5% on 2015, and while business registrations continue to decline slowly the combined total of fleet and business sales represented more than 55% of all new registrations in 2016.

No. registrations Year-on-year growth (%)

2,800,000

2,600,000

2,400,000

2,200,000

2,000,000

1,800,000

1,600,000

2011 2012 2013 2014 2015 2016

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

-4.41%

5.32%

10.77%9.35%

6.34%

2.30%


14

UK new car registrations, by fuel and use

Total Diesel Petrol AFV Private Fleet Business

2016 2,692,786 1,285,160 1,318,707 88,919 1,206,250 1,380,750 105,786

2015 2,633,503 1,276,871 1,283,857 72,775 1,208,812 1,317,570 107,121

Change y-o-y 2.3% 0.6% 2.7% 22.2% -0.2% 4.8% -1.20%

Market share 2016 47.7% 49.0% 3.3% 44.8% 51.3% 3.90%

Market share 2015 48.5% 48.8% 2.8% 45.9% 50.0% 4.10%

Source: SMMT

Car finance growth

Figures from the FLA show a year-on-year rise of 6% in 2016 for new cars bought by consumers on finance through dealerships, with the total surpassing 1 million units. Consumer used car finance also performed well, growing 9% to 1.25 million units. In value terms both new and used car segments grew 12% on the previous year.

In total, in 2016 the point of sale (POS) consumer car finance market grew 8% in volume to 2.3 million units and 12% in value to £31.6 billion.

The percentage of private new car sales financed by FLA members through the POS reached 86.6% in 2016, up from 81.4% in 2015.

The FLA’s Geraldine Kilkelly notes: “The POS consumer car finance market reported another record year in 2016, with new business volumes reaching 2.3 million cars. Our latest confidence survey suggests broadly stable new business volumes in 2017.”

Meanwhile, FLA figures for the volume of new cars bought on finance by businesses showed a slight drop of -1% compared with the previous year. However, it was a different picture for the much smaller segment of used cars purchased on finance by businesses, with the total bouncing back after a period of decline. As will be seen elsewhere in this report, forecasts are for growth in the used car market in 2017.


15

Cars bought on finance, 2016

Source: FLA

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

25%

20%

15%

10%

5%

0%

-5%

9%

-1%

20%

Number, 12 months to Dec 2016 Change on previous year

Consumer new cars

Consumer used cars

Business used cars

Business new cars

6%

MARKET OUTLOOK: Chris Bosworth, Director of Strategy, Close Brothers Motor Finance

Another year of innovation and improvement ahead

2016 was one of the best years on record for the motor industry. We saw sales in the new market surpass 2.7 million registrations for the first time, car manufacturing peak at a 17-year high and the used car market experience an unprecedented rise in popularity.

This is a far cry from what experts predicted would follow after the Brexit referendum result, with many expecting a sharp drop in consumer confidence and halting production lines. The result, from the depreciation of the pound, actually spurred car production through increased export orders from foreign buyers. Indeed, 45% of our own dealers, from our monthly Dealer Satisfaction Survey, cited that

business performed better than it did pre-referendum vote.

2016 was clearly an exciting and prosperous time for the car industry, so what does 2017 have in store?

Innovations in vehicle technology

Continuing innovations in technology – be it safety improvements, autonomous driving technology or alternative fuel vehicles (AFVs) – are crucial in driving consumer interest in new cars. Last year alone there was a 22% increase in sales of AFVs – if this trend

Chris Bosworth

15


1616

continues and consumer interest in this technology continues to rise, AFVs could well be one of the key factors in encouraging new car purchases over used vehicles in 2017.

Increase in technology at the point of sale

In 2016, we started to see manufacturers opt for a direct-to-consumer approach, instead of relying on dealerships. Peugeot and Hyundai led the way on this front, through their ‘simple and quick to buy’ online portals. Although experiments which put emphasis on the digital sales process might gain the headlines, whether or not they are a viable alternative that other manufacturers will look at remains to be seen.

F&I platforms are also increasing in popularity, something backed up by the sheer number of new platforms beginning to emerge in the market. Again, this looks set to continue this year. Existing platforms, such as Dealtrak Network are also starting to align with smaller and independent dealers, who are increasingly demanding technology at the point of sale.

Interestingly, we’re also seeing an increasing number of customers now paying in finance rather than a lump cash-sum. This is perhaps a reason why Autotrader and other outlets are now listing price-per-month in addition to up-front total cost.

In light of the above, we expect to see growth in the pre-screening credit market at the PoS. Many dealers have already started adopting this technology, as it means they know who is likely to be accepted without leaving a mark on customers’ credit scores.

Increase in the use of PCP and other forms of finance

2017 will see a continuation of the shift from ownership to user-ship, with finance packages having to be adjusted accordingly. Last year, we saw increasing penetration of PCP (personal contract purchase) in both the new and used car markets – however, despite a surge in its popularity, we expect PCP to plateau out at around 80% of new finance deals and 45-50% in used finance deals this year.

Personal contract hire (PCH) will also start to take share from hire purchase (HP) finance packages, with more than 10% of PCH being on new car finance. However, many manufacturers will still prefer PCP over PCH, which means that PCH is more likely to replace HP in new finance deals.

Regulation in the market

Regulation will be a key talking point in 2017, and we are already seeing customer pricing and dealer remuneration changes having a visible impact on the market. This is due to the value proposition of secured PoS finance becoming far more transparent – this is a victory for the consumer.

The FCA’s thematic review of early arrears management, which was published in December 2016, toward unsecured lending is also likely to have an impact in the motor finance industry. The industry still has a long way to go to ensure customers achieve fair outcomes when it comes to arrears, whilst maintaining regulatory compliance. This will result in many areas for improvement of current policies and procedures in 2017.


17

Upward trajectory continues into 2017Momentum has been maintained at the start of 2017, with SMMT figures showing a record high for UK new car registrations in January – a 2.9% year-on-year uplift to reach the highest level since 2005.

Richard Jones, Managing Director of motor finance provider Black Horse, part of Lloyds Banking Group, said: “It’s pleasing to see a strong new car market in the first month of the year, and I expect the rest of Q1 to see sales remain at similarly resilient levels.”

The main driver of growth remains private consumers. There was a strong performance in the alternatively-fuelled vehicle segment, which grew 19.9% to take a record 4.2% market share – exceeding 4% for the first time. Registrations of petrol cars grew 8.9%, but diesel registrations fell by 4.3%.

Jones commented: “It is possible that the figures in some segments are partially fuelled by impending tax changes, with demand effectively being pulled forward as a result. It is difficult to call exactly how 2017 will pan out but this time last year many were predicting a cooling off from the unprecedented sales levels of recent years. We saw that to an extent, but still saw an overall 2.3% increase on the previous year.”

He continued: “With this in mind, it’s almost inevitable that record levels will cool at some point, particularly against a backdrop of potential car price rises due to the weakness of the pound and possible implications of Brexit. However, dealers can guard against this particular challenge by emphasising the importance of finance deals, which I expect to remain very competitive. More than ever, dealers should ensure customers genuinely understand how finance deals can help them access the vehicles they want.”

More than ever, dealers should ensure customers genuinely understand how finance deals can help them access the vehicles they want

Richard Jones


18

MARKET OUTLOOK: Rob Abrahams, Head of Market Development, carwow

Will market changes directly impact the current trends in consumer car buying behaviour?

The impact of Brexit is uncertain, and I don’t profess to be an economist. The hypothesis that the movement of production from the UK and an increased cost of borrowing will raise the cost of vehicles and vehicle finance seems logical – and subsequently market demand would fall, so says the basic supply and demand economic logic. But on the question of whether these predicted market changes will directly impact trends in consumer buying behaviour, I think there’s zero chance. Here’s why.

Consumer expectations and behaviours once shifted don’t go back. After cars, we didn’t go back to horses, and after Netflix, Blockbuster went into administration. There are three key trends in consumer retail that are already established in other industries but are making new waves in automotive. These are transparency, independence, and convenience – the three things that will, even with changing market forces, continue to shape consumer buying behaviour.

Transparency – If the market shifts such that the supply of vehicles decreases and the cost of borrowing increases, will this make people more or less price conscious? People want to know that the price they’re paying is fair within the market, whatever that market looks like. 75% of people don’t buy from the cheapest dealer on carwow, so they know they could have paid less. But it’s not always the price point that’s critical, it’s the openness and transparency that comes from seeing a price in context versus in blinkered isolation.

According to an Econsultancy blog 51% of people have used their phone to compare prices and reviews of a product when they’re actually in a store at the point of purchase, showing the desire for an easy

comparison. Today you’d be pushed to find a store that doesn’t provide WiFi – retail is acknowledging the fact that consumers demand transparency.

Independence – Similarly, if the price of consumer products is materially impacted by visible market changes, consumer confidence slips. Consumers then look to independent information sources to make the right decision. Deloitte research found that independent advice is twice as trusted as that of the manufacturer or provider. The same is true of peer reviews, which are trusted in equal measure to advice offered by friends and family.

Now consider the value of traditional above-the-line advertising, with 84% of millennials distrusting a company’s own marketing messages. Ouch. So multi-channel and native marketing becomes critical. More research is done online, and there’s more reliance on independent portals to build trust and purchase confidence. This means the dealership becomes less of a sales environment and more of a product experience with the elusive critical decision point happening online before initial contact. The concept of driving footfall starts online – without a strong digital presence that’s multi-channel and validated by independent parties, the physical environment and all associated investment is wasted.

Convenience – This isn’t something we’re likely to give up either, whatever the economic conditions. A recent Google study centred on one customer’s ‘900 digital interactions’ before buying a car – and it’s our industry that makes that journey so difficult.

Rob Abrahams


19

Imagine walking into John Lewis for a TV and being told that each brand was showcased in a separate part of the store. We as an industry have made it incredibly difficult for customers to buy, and in my view we need to collaborate more to link these interactions, reduce friction points, increase speed from research to purchase and minimise as far as possible the chance for that customer to drop out of the purchase process. Think about the concept of blockchain, where digital information is shared and distributed with the goal of a smoother customer experience.

Whatever happens with the UK automotive market, whether driven directly by Brexit or as a result of natural continued development, consumer expectations will continue to change.

Removing friction points in the digital journey through price transparency, a convenient presence wherever the consumer is online, and embracing native advertising to build consumer trust, will maximise the chance of car sales whatever the economic weather.

Is there a debt bubble?The FLA figures show that its members provided £31.6 billion in funding for cars in 2016. Concerns have been raised by some market analysts that, with a record number of cars being bought and nine out of ten of those being purchased via personal contract plans (PCPs), a dangerous level of debt is building up.

Parallels are being made with the sub-prime mortgage bubble prior to the financial crisis, as some auto loans have been packaged into asset-backed securities (ABS) with top-level ratings from the rating agencies and sold on to large investors such as pension funds, regardless of the creditworthiness of loan recipients.

However, in the UK the amount of car loans is a fraction of pre-crisis mortgage debt and the level of delinquencies is currently very low. A steady rise in inflation could have an effect on this, but the Bank of England and Financial Conduct Authority (FCA) will be monitoring the situation closely.


20

MARKET OUTLOOK: Dean Bowkett, Managing Director, Bowkett Auto Consulting

Residual values and used vehicle values – a bearish approach to Brexit

Whatever your personal beliefs, 23 June 2016 was a momentous day for the UK and Europe. Sterling is now near a 30-year low which has pushed up costs for companies and consumers alike, with rising prices on imported goods – and the UK has lost its AAA credit rating.

However, the overall performance since the Brexit result was revealed has been far more bullish than most had forecast. Share prices are now trading above pre-referendum levels for the FTSE 100 and FTSE 250. There has not been, nor is there forecast to be, a recession or economic slump with the Bank of England base rate now at a record 0.25%. Inflation is running at a healthy 1.6% and the Bank of England’s latest 2017 growth forecast has risen to 2% compared to just 0.8% forecast in August 2016.

On the automotive side new car sales in the UK saw another record year of just under 2.7m, which is 4.4% up on the pre-economic crisis record set in 2003. Despite record sales levels there also remains headroom for more growth with 2016 equating to only 41.2 new cars sales per thousand of population, well below the 43.2 seen in 2002 and 2003 thanks to the rising population. The automotive leasing industry also saw the total fleet rise by 10.9% year on year according to the FN50 as at November 2016.

But 2016 wasn’t good for all parts of the industry as the used car market saw used values and forecast residual values falling sharply after enjoying steady growth over the previous five years.

Dean Bowkett

Source: Experteye

2010 2011 2012 2013 2014 2015 2016

EU Average UK Index 100 = 2010

120

115

110

105

100

95

90

% RV Index – 36 months / 90,000 kms


21

So the Bank of England has been more positive about its 2017 forecast, and the Economic Sentiment Indicator for the UK had recovered by December 2016 from the crash to 102.6 immediately post Brexit hitting the highest level for a year. New car sales had another record year with headroom for more growth, therefore the fall in used car values and residual values should just be a short-term problem shouldn’t it?

The answer to that lies in the time period you are considering and also what side of the automotive industry you are in. Part of the reason why Brexit has not had much of an impact is simple. It hasn’t happened yet and we are still two years away from it happening. The Bank of England’s governor has said that as we move closer to Brexit he expects the UK economy to decelerate, creating a more bear-like economy.

The UK is also back on an inflationary path which will squeeze car buyers’ pockets. Second, the weakness in sterling will continue to make the UK an expensive place to import goods into. This will put a squeeze on manufacturers’ ability and willingness to heavily incentivise UK new car sales. When we combine these facts we are facing a fall in new car sales of at least 5% in 2017 and up to 15% by the time we go through Brexit in 2019 compared to 2016.

Whilst reduced new vehicle discounting should ease the downward pressure on younger used vehicle values, rising inflation is going to continue to support falling used values over the next couple of years. In a worst case scenario by the time Brexit happens used values could have dropped by 7-8 percentage points in the UK.

But this is where timing plays an important role. Anyone budgeting to sell used vehicles over the next couple of years now has to face the challenge of these expected drops, but if you are setting residual values for vehicles going on lease or PCP for 3-4 years you will probably want to start considering a more

positive outlook. The UK has a used car recession approximately every eight years and it takes about 18-24 months from crash to recovery. This means a vehicle leased for four years should come back to a post-crash market place. It will certainly be in a post-Brexit market where consumer spending has always been a cornerstone of the economy and consumer confidence is likely to be in a post-Brexit honeymoon period.

2012 2013 2014 2015 2016 2017 2018 2019 2020

6

5

4

3

2

1

0

1

2

3

6

5

4

3

2

1

0

1

2

3

+

_

+

_

Actual GDP Growth

Bank estimates of past growth New projection

UK GDP projections to 2020

Source: Bank of England (February 2017)


22

The UK vehicle leasing marketThe trade body for the UK vehicle rental and leasing sector is the British Vehicle Rental and Leasing Association (BVRLA). Its 900+ members accounted for a total fleet of over 4.7 million vehicles at year-end 2016.

BVRLA member fleet, by segment

Corporate leasing fleet Personal leasing fleet Short-term rental fleet

2016Change on

2015 2016Change on

2015 2016Change on

2015

Passenger cars 2,018,266 -0.2% 1,627,517 14.4% 253,388 0.3%

LCVs 549,809 8.7% 12,863 12.0% 153,726 -0.5%

Trucks 70,776 7.3% 1,410 9.6% 23,748 2.4%

Total 2,638,851 1.7% 1,641,790 13.0% 430,862 0.1%

Source: BVRLA

In terms of ranking by fleet size the list of leading vehicle lessors has not changed to a great extent over recent years, although notable growth has occurred in some cases through acquisition or merger, as shown in the table.

The combined annual growth rates over the five-year period from 2011 to 2016 are impressive for almost all the top 10 lessors. Even when the figures are adjusted to allow for growth through acquisition, only Lex Autolease, already by some distance the market leader, has dropped slightly in size.

Total BVRLA member fleet size by vehicle type

2015 2016 % Change

Passenger cars 3,698,005 3,899,171 5.4%

LCVs 689,508 716,398 3.9%

Trucks 90,458 95,934 6.1%

Total 4,477,971 4,711,503 5.2%

Source: BVRLA

The largest segment of the BVRLA member fleet, corporate leasing, comprised over 2.6 million vehicles, more than three-quarters of which (2 million) were passenger cars. However, in 2016 this segment grew by a modest 1.7%, whereas the personal leasing segment grew an impressive 13% year on year to over 1.6 million vehicles (of which, not surprisingly, 99% were passenger cars).


23

Top 10 UK vehicle lessors, as of Nov 2016

Company 2016 fleet size 2011 fleet size CAGR 2011-16

Lex Autolease * 333,038 280,218 -1.0%*

LeasePlan UK 165,839 130,200 5.0%

Arval UK ** 157,161 86,591 3.9%**

Alphabet (GB) 147,823 99,154 8.3%

Volkswagen Financial Services Fleet 137,960 49,437 22.8%

ALD Automotive 118,903 63,561 13.3%

Zenith *** 58,392 22,136 0.2%***

Arnold Clark Finance 51,717 49,339 1.0%

Hitachi Capital Vehicle Solutions 51,420 33,375 9.0%

Citroën Contract Motoring 44,777 21,758 15.5%

Notes: * 2016 total includes Lombard Vehicle Management (Fleet size: 70,621 in 2011)** 2016 total includes GE Capital Fleet Services (Fleet size: 49,495 in 2011)*** 2016 total includes Leasedrive (Fleet size: 35,659 in 2011)

Source: Asset Finance International, Fleet News FN50

Concerns expressed in the industry include the potential impact of Brexit on interest rates, currency exchange rates and the effect that could have on pricing and inflation. It has been noted that manufacturers and funders have been adjusting pricing upwards.

Lessors face the prospect of several challenges in the coming months, including dealing with proposed changes regarding company cars and salary sacrifice schemes, vehicle excise duty (VED) changes due in April, and the Worldwide harmonised Light vehicles Test Procedure (WLTP) for CO2 emissions due in September.

Many firms are delaying investment in their fleets until the implications of Brexit become clearer, but business operations continue and companies with short-term leasing needs are likely to look for greater flexibility in their fleet leasing arrangements, such as shorter rental terms rather than the traditional three-year contract.


24

MARKET OUTLOOK: Gerry Keaney, Chief Executive, BVRLA

2017 set to be the busiest year in the BVRLA’s history

You don’t need a crystal ball to identify the big challenges facing our industry this year. First and foremost is Brexit and the political and economic uncertainty this brings, closely followed by the growing focus on air quality. Our industry also has to get to grips with some very significant and deeply flawed changes to the tax and emissions regimes.

2017 sees the BVRLA celebrate its 50th anniversary, and we predict it will be the busiest year in our history. There will be lots of fervent negotiating in the next 12 months, most of it centred around obtaining a workable trade deal that replaces the UK’s membership of the Single Market. We expect the UK government to take a very pragmatic approach in retaining most EU regulations and directives, but any devaluation of sterling will put major cost pressures on the fleet supply chain as prices of vehicles, tyres and parts are expected to rise.

The association is actively involved with the Financial Conduct Authority as it continues its regulation of the sector, and we’re also working with HM Revenue & Customs and the International Accounting Standards Board ahead of the introduction of the new lease accounting standard (IFRS 16) which is due to come into force from January 2019.

It’s three years since the FCA took responsibility of regulating the consumer credit market, and the FCA will now be looking at potentially increasing the scope of its regulation, looking at the circumstances when it should intervene with regard to unregulated activities.

On the lease accounting standard, HMRC issued a discussion paper last year to obtain views on the way leases should be taxed in the future. This review represents a real opportunity to introduce a simpler system that protects government revenues while providing a fairer, more transparent tax relief structure

for the vehicle leasing industry. Our members spend billions of pounds on new cars, vans and trucks each year and the right tax regime could really help drive the uptake of ultra-low emission vehicles.

This is an area in which BVRLA members have been incredibly successful. Last year was another record year for the association, which saw its membership pass the 900-mark with a combined fleet of 4.7 million vehicles – an increase of 5.2% year-on-year.

The BVRLA has seen growth in all of its main membership categories, and last year saw the personal leasing portion of our member fleet grow by 13% to 1.6 million. The corporate leasing fleet saw more modest growth of 1.7%.

We believe we will see a low single-digit percentage increase in the traditional fleet leasing market, but growth for vans will be much stronger, at around 10% year-on year, led by the continued growth of online retailing and the trend for companies to downsize from small HGVs and reduce their compliance burden. The SME and consumer markets will continue to drive most of the organic growth in the leasing sector, and we predict some BVRLA members will again report double-digit growth in personal contract hire volumes.

The vehicle and rental industry is resilient, innovative and totally client focused. We believe BVRLA members will continue to meet the challenges in the year ahead, turning many of them into opportunities to deliver yet more value to their customers.

Further market information is available on the BVRLA YouTube channel: http://bit.ly/bvrlayoutube

Gerry Keaney

24

http://bit.ly/bvrlayoutube


25

MARKET OUTLOOK: Jon Lawes, Managing Director, Hitachi Capital Vehicle Solutions

Fleet lessors need to keep pace with economic, political and technological challenges

We wish it weren’t so, but the economic environment is challenging for everyone at the moment. The pound has lost 16% of its value against the dollar since the EU referendum last June, and those of us in business finance are all too aware of the inflationary effect that is having.

The real cost of running a vehicle is increasing, with tougher exchange rates pushing up both purchasing costs and the prices of spare parts. Budget constraints in turn put pressure on labour rates for repairs. The task for providers like Hitachi Capital Vehicle Solutions is to examine every link in the supply chain to find the best possible value for our customers.

On top of this is the challenge of keeping up with government policy changes. Two, in particular, have big implications for the future of company cars. The first is the new approach to benefit in kind taxation for salary sacrifice, announced in last November’s Autumn Statement, whereby the amount payable will be calculated based on the higher of the gross salary sacrificed and the cash equivalent of the car – to come into effect from 6 April 2017. The second is the rapid increase in company car tax (CCT) rates that we’ve seen in recent years, and that will continue until at least 2021.

Together, these changes will mean that flexible benefit arrangements may no longer be the most cost-effective solution for many employees. Now, more than ever, businesses need to review their company car policies and funding arrangements, and bring them into line with the new tax landscape.

Providers should be working closely with each of their customers to develop policies that meet specific organisational needs and that take the whole life costs of vehicles into account. This may mean switching to a more blended approach, for example offering different funding methods tailored to each individual driver.

A blended funding approach is likely to include traditional contract hire alongside alternative options such as employee car ownership and credit sale.

At the same time, greener motoring is also becoming more attractive. Ultra-low emission vehicles will be exempt from the salary sacrifice changes, and will face lower CCT rates than other cars. These are just two of the carrots that the government is offering to reward those who go green, but there are sticks too.

London’s £10-a-day emissions surcharge, or T-charge, will take effect in October, before the capital becomes an ultra-low emission zone in 2019 or 2020. Other cities are developing similar schemes, and the government’s new Air Quality Plan is due in the coming months.

We welcome measures that will protect the environment and improve the quality of the air we all breathe. However, a patchwork approach risks confusion that could undermine these policies. We need to see consistency of standards and charging across different cities, keeping things clear and simple for all road users.

This is particularly important as more and more alternatively-fuelled vehicles come on to the market. This is a happy trend that shouldn’t be stalled. After all, drivers and fleets deserve to benefit from the lower fuel costs of electricity or compressed natural gas, and all of us from lower emissions and cleaner air.

Economically, politically and technologically, the next few years are going to be fast-moving for the automotive industry. As ever, providers like Hitachi Capital Vehicle Solutions must use our expertise to help our customers prepare for the future.

Jon Lawes

25


26

MARKET OUTLOOK: Rupert Pontin, Director of Valuations, Glass’s

2017: Insight and intelligence required to prosper in the year ahead

Following such an exciting 2016 it would seem that 2017 will present as many challenges and opportunities as ever. Whilst there are expectations of lower consumer confidence and more difficult trading conditions as the country picks its way through Brexit, there will be plenty of opportunity for profit in the UK motor trade for those that have prepared well.

New car sales that reached a peak last year will fall by somewhere around 3.5% as manufacturers seek to make greater profits by selling their cars in Europe. This will be more profitable for them following the shift in the exchange rate and has taken a while to impact, due to the need to switch production from right hand drive to left hand drive. New car prices in the UK will also increase notably to balance the shift in the strength of the pound.

This will mean that there will be less need to force cars to the new car market so expect that pre-registration activity will also fall. In addition to which the increase in new price will also necessitate an upturn in

monthly PCP charges, so cars will be marginally more expensive on a month-by-month basis. These PCP prices are also directly affected by the future residual value set in each deal and as the used car market sees greater volume there will be pressure to reduce the expected value of each car and as such increase the amount funded and therefore either the deposit or the monthly payment.

The used car auction market grew by around 3.5% in 2016 and there was also an increase in the volume of cars offered in the wholesale trade via other electronic remarketing channels. These online platforms offer reduced costs and higher returns for vendors when the market is either short of stock or finely balanced, but as volumes increase expect more cars to go to auction as the buyer begins to be able to call the shots at the time of sale. Expectations are for used car volumes to grow by 6% during 2017.

Used car market valuesRecent figures from British Car Auctions (BCA), a major player in the UK used car market and Europe’s largest vehicle remarketing company, show that average values in the fleet and lease car sector remained relatively stable across 2016, rising by less than 1% in the 12 months to December. However, values slid 5.6% in the final quarter, from the year’s high of £10,236 in October to £9,665 in December.

With predictions for new car sales to decline in 2017 from their record level in 2016, the view in the industry is that used car sales should hold up well, which will help dealers maintain business flow.

Rupert Pontin

26


27

With volumes growing there will be some increased pressure on used car values. During 2016 there was significant pressure on late plate values due to pre-registration activity. This was combined with an upturn in values of older cars, essentially squeezing the differentials between year plates. This will ease this year as new cars sales drop over the course of the year. Glass’s expects values to drop around 4% overall.

With changes such as these expected in the market Glass’s has become aware of the need for greater, more detailed market insight and intelligence. Where previously vendors and retailers interrogated their own data and had the confidence to set strategy based on their own historical performance, the air of confidence has shifted. The use of alternative market information has become of paramount importance.

With such varied economic scenarios depicted by various experts based on limited previous fact, it is essential to take a broad view.

This is specifically the case when considering future residual value setting as this is the cornerstone of effective contract hire and lease rates for the business market and also for PCP future values for the private car market. With more used cars hitting the forecourts as well, used PCP finance products based on forecast values will also become more important.

In summary, there is an exciting and challenging year ahead. Whilst new car sales will drop there will be plenty of opportunity in the used car market. Brexit will have a part to play too and businesses will need to have plenty of intelligence and insight to help identify market drivers and changes whilst they seek to improve profits and market share. There are other pitfalls along the way too and the diesel discussion, VED changes and WLTP changes all warrant serious consideration.

Sébastien Duval

MARKET OUTLOOK: Sébastien Duval, CEO, AUTOi

The used car market comes into its own

At the beginning of 2017 we published an opinion that this would be the year of the used car. Nothing has happened so far to discourage that view. As the year wears on it is increasingly clear that the balance of opportunity is weighted away from the new car market for the first time this decade.

We base this on two factors: the inevitable pressures on the new car market that a weaker sterling will bring and direct observation of increasing activity in the used car sector. For new cars there will be an inevitable impact from the impending changes to VED, around which there is growing publicity about increased long-term ownership costs. There are also signs that manufacturers are almost buying new business with an unprecedented level of discounting on even their recently-launched models.

If you want to know what the future holds just follow the money – and the money manufacturers are currently throwing at new cars is unsustainable for profitable long-term trading.

Meanwhile there is still strong retail demand for cars in general and demand from AUTOi’s dealer customer base for used cars has increased markedly. We saw a 300% pro rata increase in dealer purchases from our Wizzle consumer car sales portal during January compared with the last quarter of 2016. But the biggest sign of increased demand

27


28

in the trade for used car retail opportunities is the doubling – almost overnight – of dealer log-ins to chase fresh stock.

This has been sustained and confirms that increased interest in used cars is here to stay this year.

This in turn signals another trend for 2017 – the diversification by vehicle retailers of their stock sources. Dealers are no longer content to fit in with the traditional routes from which they generate quality used car stock. Dealers want to feel more in control than they do by relying on customers walking in through the door or auction sales alone. Part-exchange and auction will be increasingly augmented by channels which enable them to be more proactive.

A sign of this has been the immediate response to AUTOi’s independent auction channel which feeds stock into the portal and which saw cars exchanged immediately even before we promoted its existence.

Inevitably 2017 will therefore also provide fresh opportunities for the finance sector to provide funding for new stock-sourcing methods. All of this adds up to 2017 proving to be a year in which diversification will be a significant theme. Consumer caution is likely to grow as Brexit negotiations inevitably spark scare stories about the future of the economy, but they will respond by buying more carefully rather than not buying at all. The recent record years for new cars resulted in more high quality used car availability than at any previous time and dealers will make the most of those opportunities.

Investment in UK vehicle production SMMT figures show UK car production exceeded 1.7 million units in 2016 – a 17-year high. Of these, a record number went for export, with 56% of the total number of cars built going to the UK’s biggest market, the EU, driven by the continuing economic recovery across Europe.

As the SMMT makes plain, this upswing was not due to some post-referendum bounce, but the result of investments made over recent years in production facilities, cutting-edge design and technology and a highly skilled and productive workforce.

And the critical importance of tariff and barrier-free trade to future UK automotive production post Brexit is underlined by the fact that the majority of components used in UK-built vehicles come from Europe.

However, that there are signs that investment is falling. The SMMT notes that “total committed investment announcements in the automotive sector in 2016 were approximately £1.66 billion across a number of companies. This figure is down from £2.5 billion in 2015.” The total for 2014 was also £2.5 billion, so by any measure the 33% drop in 2016 compared to the preceding years represents a serious decline in the level of planned inward investment.


29

MARKET OUTLOOK: Kit Wisdom, Head of Technical Services, Alphabet GB Limited

The connected car in 2017

2017 will be the year of increased vehicle connectivity and data sharing as the industry starts to take advantage of the huge opportunities opening up. This will be achieved as more manufacturers share information generated by the vehicle and bring new solutions from connected car information to the market.

These solutions include the introduction of Accident Call (or ‘A-Call’) providing assistance to drivers in low impact situations and increased prevalence of service and maintenance data being available to the leasing industry – thus enabling a more proactive and hassle-free approach to delivering services to the driver. This shift is being driven as much by advances in technology as it is from customer demand, once drivers experience the benefits and potential of this shared data.

By having a more open and communicative relationship with manufacturers when it comes to data sharing, drivers’ experiences will be greatly improved and fleet decision-makers will also benefit from reductions in vehicle downtime, increased duty of care and greater control over things like maintenance scheduling. Not only will any potential vehicle downtime be reduced, but also it’s more productive for the employee – the time required by a driver spent on the phone, via email or waiting for a response can be massively condensed, with more intelligent

customer support able to book vehicles directly into a workshop.

For 2017, the industry should be embracing new techniques for more intelligent customer support in the short term, as well as using the connected car data to shape and deliver new services in the medium to long term. The possibilities that greater connectivity poses are taking shape, which will not only benefit drivers but also corporate fleet or mobility teams – whether they are in HR, Operations, Finance or Procurement functions – who are responsible for large vehicle fleets and keeping employees on the move.

Aside from the obvious customer service benefits, greater connectivity and technological improvements will result in the wider application of ‘over the air’ communication to and from vehicles. Already one or two few manufacturers are championing remote software updates for vehicles. With the government predicted to make firm commitments to smart motorways and connected streets in the Modern Transport Bill due to be published this year, this is just the start of a generational shift for the industry, wider society and consumers.

Kit Wisdom


30

Government initiativesThe Modern Transport Bill (MTB) was announced in the Queen’s speech in May 2016. It lays out the government’s drive for the UK to be at the forefront of the transport technological revolution – including the development of driverless cars, reducing congestion and vehicle emissions, and making “much more efficient use” of roads and transport options.

Mentioned above, in a legislative move that surprised the vehicle finance industry, Chancellor Philip Hammond’s Autumn Statement caused some concern with the introduction of unfavourable tax changes to salary sacrifice schemes.

However, the forthcoming changes should help in the long-term aim of reducing emissions by encouraging the adoption of ultra-low emission vehicles (ULEVs) as these will not be affected by the new regulations. There should also be a boost to salary sacrifice registrations prior to the new rules taking effect at the end of the 2016/17 tax year as employees taking this option will continue to enjoy the benefits for another four years.

The government recently published its Green Paper on industrial strategy, in which it announced the intention to “cement the UK’s position as a go-to destination” for the development of connected and autonomous vehicle technology. This includes “investing £600 million planned in support to accelerate the transition to ULEVs. Additional funding of £270 million was announced in the 2016 Autumn Statement.” (Source: HM Government, ‘Building Our Industrial Strategy’, January 2017)

One area in which long-term investment will be required is in ensuring not only that there are sufficient charging points for electric vehicles, but that there is also adequate energy supply – analysts have pointed out that converting fleets to electric, including public transport and taxis, will place a major additional burden on energy production.

The forthcoming changes should help in the long-term aim of reducing emissions by encouraging the adoption of ultra-low emission vehicles


31

MARKET OUTLOOK:David Hosking, CEO, Tusker

Despite recent tax changes UK car benefit schemes are here to stay

2017 has started off on a very positive note for us at Tusker.

Business is thriving following the clarity that the government has provided on the future of car benefit schemes. Because they’ve been treated differently, like childcare vouchers and cycle to work schemes, car benefit schemes will continue as they always have done, providing a highly sought-after additional benefit for employees.

There have been a number of myths and some negativity perpetuated by areas of the media, which as a market leader in car benefit schemes, we have spent much of the past few months dispelling. Little will change for Tusker – we will continue to provide highly sought-after car benefit schemes for the public and private sectors now that we have endorsement from the government.

Much has been said about potential price rises with the changes to the tax treatment on cars above 75g/km which will come into force in April, but our modelling suggests that the majority of our drivers will not be affected at all. And where there are increases, in the main this will be just a couple of pounds, and so unlikely to make a huge difference to our customers. And that’s really at the crux of everything – if we can ensure our customers and drivers understand the minimal impact of the changes that the government has made, which we’re working hard to do, then we can continue to grow at the same rate at which we have done in the past, which is over 80% in the last three years.

The confirmed change to the tax treatment will only, in reality, affect a small number of vehicles,

with those with CO2 emissions of 75g and below remaining exempt from the changes. As a carbon neutral organisation, we heavily promote lower emitting vehicles (there are over 150 currently available with more being added all the time) as well as offsetting all of our cars’ tailpipe emissions at no cost to our drivers.

2017 has the potential to be a year of huge growth and development. Since the UK Chancellor’s Autumn Statement we’ve launched many new schemes across the UK, and January was our best ever order month with over 1,000 orders placed. We are positive – we’re expanding our product offering this year, as well as improving our internal systems as part of an efficiency drive to ensure we continue to provide the very best in customer service at all times.

And, in a time when online reviews can have a massive impact on the reputation of an organisation, we’re hugely proud of our five-star Trustpilot rating, and our 97% customer satisfaction level, but we’re always on the lookout to improve.

We’re very excited about 2017 and despite 2016 being a challenging year government gave us exactly what we needed most from the Autumn Statement: certainty. Certainty that car benefit schemes will continue and certainty that they will remain a highly valued benefit of employment for years to come. I’m certainly looking forward to the year ahead.

David Hosking


32

Austin Collins

MARKET OUTLOOK: Austin Collins, Managing Director of BuyaCar.co.uk

Potential growth areas in 2017

Car finance may be at record levels but there is still large potential for the market to grow and adapt in 2017.

It will, of course, depend on the political situation. Economic indicators are increasingly contradictory and Britain is making an unprecedented manoeuvre with Brexit which is bound to create uncertainties. Even with that in mind, we feel confident to flag several expectations.

First, a prediction: just as PCP replaced HP as the preferred way to finance a car, personal contract hire will replace personal contract purchase.

This is a logical extension of the trend away from absolute ownership as consumers increasingly regard their car much in the same way as they do their mobile phone. Now that the PCP culture has matured, many motorists have grown used to swapping into another PCP deal at the end of the term with no intention of making the final payment to own their vehicle. This erosion of the desire to own cars removes the need for such an option, which makes PCH a natural choice.

Another factor which could push consumers toward either PCP or PCH is the mounting tax and regulatory pressure on diesel from all angles, which we will surely begin to see reflected in residual values. If consumers are paying attention to this they are even more likely to choose finance options which reduce their exposure to a disappointing future value. Fear of more draconian penalties on diesels will only serve to accelerate this.

For the automotive finance world in general we expect no substantial change in interest rates, which will ensure that finance packages remain attractive to consumers. High Street lenders will continue to drum up business at the expense of their own motor finance arms and we expect more banks to offer personal car purchase loans undercutting or matching specialist lenders. Our own experience at BuyaCar.co.uk is that finance penetration is settled at around 70% of deals. This appears to have stabilised since we first reported a year ago that this figure had reduced from around 90%.

Where we do expect to see finance growth is in used cars, which themselves are going to be this year’s growth area in general. As expectations grow of a slowdown in new car registrations this year, we see used cars taking up the slack. All of the evidence from our own consumer research confirms that people’s reluctance to buy used cars online is rapidly diminishing. Our own platform sees nine used cars sold for every new car and finance penetration on those used car sales is on the increase.

We sold 48% more cars in 2016 than in the previous year and expect further strong growth this year. That represents a big opportunity for finance business and used cars will be responsible for the lion’s share of that for BuyaCar.co.uk in 2017.


33

Economic outlookThe 12 months since the last Asset Finance International UK country report have demonstrated how easily predictions can be proved wrong, with many commentators being caught out by the June referendum vote to leave the EU.

And the predictions of the immediate effect of the leave vote on the UK economy were wide of the mark, as the economy has performed well. Contrary to many projections there was no dramatic fall in the markets immediately after the vote, apart from in sterling. Consumers have carried on spending, buoyed by the short-term prospect of continuing low interest rates, and the stock markets have risen on the back of the fall in the pound.

It will take longer for there to be a post-referendum effect on economic factors such as GDP. Brexit will take place in some form or another, but not before 2019, and in the meantime business will continue and any pre-Brexit effect will be felt over time.

Meanwhile the weaker pound will push up import prices and consumer prices will follow. CPI inflation is forecast by the OBR to rise to above 2% in 2017. The fall in sterling will squeeze real household income by pushing up import prices. However, the depreciation of the pound will boost the competitiveness of UK exports in the short term.

Businesses tend to take a longer view and the continued delaying of investment will have an adverse effect on the UK economy. The most over-used word of the last year has been ‘uncertainty’, and that word will continue to crop up for some time to come. It cannot be denied that the referendum vote and the nature of the negotiations that will follow the triggering of Article 50 have generated uncertainty for firms that will lead to some investment being postponed or cancelled.

Growth forecasts

The UK economy performed better than expected in 2016, especially compared with other developed economies, although looking at 2016 as a whole, growth slowed modestly to 2% from 2.2% in 2015 and 3.1% in 2014, according to the Office for National Statistics.

With domestic consumption continuing to drive growth, projections for 2017 have been raised, although it is expected to slow somewhat after that. However, no one is willing to bet too far into the Brexit future.

The Bank of England’s revised view is broadly reflected by international analysts. The Bank’s Monetary Policy Committee’s February Inflation Report states: “The MPC has increased its central expectation for growth in 2017 to 2.0% and expects growth of 1.6% in 2018 and 1.7% in 2019. The upgraded outlook over the


34

forecast period reflects the fiscal stimulus announced in the Chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households. Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum.

“Nevertheless, continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming few years. As a consequence, real consumer spending is likely to slow.”

The report also notes: “The value of sterling remains 18% below its peak in November 2015, reflecting investors’ perceptions that a lower real exchange rate will be required following the UK’s withdrawal from the EU. Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target. This effect is already becoming evident in the data.”

Business confidence indicators

The resilience of the economy has been reflected in relatively high levels of business expectations, according to recent Purchasing Managers’ Index (PMI) surveys from IHS Markit and CIPS.

The Services PMI showed the UK service sector continued to expand at the start of 2017, although the rate of growth in total business activity moderated in January for the first time in four months. There are concerns regarding rising costs (especially fuel), salaries and higher import prices. However, optimism about the coming year has risen to its highest since May last year, before the referendum.

The UK Manufacturing PMI also indicated a strong start to 2017. Output rose at the fastest rate since May 2014, as new order intakes expanded at a robust pace. Price pressures intensified, however, due to a surge in input cost inflation and output charges increasing at a steep rate.

Nearly three in five (57%) owners of small and medium-sized enterprises (SMEs) are not confident about the UK’s economic outlook for 2017, according to the latest Close Brothers Business Barometer, a quarterly survey of over 900 UK SME owners and senior management across a range of sectors and regions. This figure increased to almost two-thirds (64%) of smaller SMEs – those with under £500,000 annual turnover.

Nonetheless, just over half of respondents (51%) expressed confidence that their business would grow in 2017, whilst only 10% expect to contract.


35

Elsewhere, the most recent Small Business Index from the Federation of Small Businesses (FSB) for Q3 2016 revealed small business confidence has fallen steadily since before the referendum, finally dropping into negative territory for the first time since 2012. However, the FSB found many immediate economic conditions improving, with small firms reporting greater access to finance, a rise in new employment and reduced spare capacity in their businesses.

P2B lending

Opinions vary as to the popularity of alternative sources of funding for SMEs, such as peer-to-peer business lending. This has undeniably grown strongly in recent years, but figures from National Association of Commercial Finance Brokers (NACFB) for the year ending June 2016 show lending by NACFB members in the alternative finance segment falling by 14% year-on-year to £725 million.

This decline is in contrast, however, with figures from AltFi Data which shows P2P business lending continuing to power ahead in 2016, rising to over £1.3 billion compared to £1 billion the year before.

1.4

1.2

1

0.8

0.6

0.4

0.2

0

2011 2012 2013 2014 2015 2016

£ billion

P2P Business lending flows

Source: AltFi dataNote: Totals do not represent the entire market

These figures should be viewed in the context of lending to SMEs from other sources: FLA members provided close to £17 billion in asset finance in 2016, while bank loans remained the primary source of SME funds with gross lending flows of £54 billion, according to Bank of England data.


36

Alastair Kendrick

MARKET OUTLOOK: Alastair Kendrick, independent company car taxation consultant

The changing face of taxation of the company car

We appear to be living in a time in which the company car is a target of HM Treasury to raise additional revenue. This is clearly the case with their increases year on year on the level of benefit in kind which is being charged for those who drive a company car. There seems no intention to stop this policy which is likely to impact on the levels of employees in the UK who decide going forward to take a company car.

In the recent Autumn Statement we got details of the government’s future policy in regard to salary sacrifice. This policy impacts significantly on the company car, not just for those who have a salary sacrifice arrangement in place for their car but also those employees who in their contracts of employment have a cash or car alternative.

First, looking at those employees who have a company car in a salary sacrifice arrangement, the rules change from 6 April 2017, blocking new entries into such schemes except those employees who take an ultra-low emission vehicle (sub 75g/km) which is not impacted by the proposed changes. In regard to those employees who entered into a salary sacrifice arrangement prior to 5 April 2017 they are allowed to continue in the arrangement and enjoy the tax benefits up to 5 April 2021.

For employees who are tempted post 6 April 2017 to enter into a salary sacrifice arrangement for a vehicle then they will face an income tax charge which is set at the higher of the sum that they are sacrificing or the benefit in kind arising on the vehicle they take under the scheme. The employer will face a Class 1A National Insurance charge on that same sum.

It should be noted that HMRC have until recently been undertaking further consultation on their proposals and we will have to wait until the spring budget in March before we know how the final rules will look. However, we are not expecting any significant changes from what I have highlighted above.

The one area which created some surprise was the decision that these salary sacrifice rules will be extended to cover off those employees who in their employment contract have a choice of a company car or cash. This change applies from the earlier of the 6 April 2018 or for any new contract or revised contract issued post 6 April 2017. Employers will need to be mindful of this change because a revision in an employee’s contract for some minor reason could trigger this change in taxation relating to the cash or car alternative. We are told the rules when issued will carry some exceptions which may cover if a contract is revised due to changes in costs imposed by a supplier which is outside of the control of the employer/employee. We need to ensure this is covered off in the final version of the legislation when it becomes available.

In reality, this change of approach is unlikely to impact on those workers who have opted for the cash alternative, seeing in most cases this sum will be greater than the benefit in kind on their benchmark car. Therefore the difficulty sits with the employee who decided to take the company car, who from April 2018 at latest will see himself/herself taxed on a significantly greater figure being the cash alternative. It will be interesting to see how employers decide to deal with this.


37

It may be that a significant number of employers will simply decide that the sensible step for those who have taken a company car rather than cash to have their contracts changed to remove the cash alternative. Whilst this seems a simple fix it may not be straightforward to implement and may get an adverse reaction from employees. The figures suggested in the press over the number of employees who could be impacted by these changes is substantial – it is clear that HMRC have no intention to agree to change their approach to exclude this area.

The question is what impact will these changes have on the popularity of the company car? It was clearly good news to the leasing industry that the government announcement did not impact on those who had entered in to a salary sacrifice prior to 6 April 2017. The question is whether there is a sufficient range of ultra-low emission cars available to attract those employees who wish to still take the tax break. I am sure these changes will make motor manufacturers respond with a greater number of cars that are sub-75g/km.

Alastair can be contacted on [email protected]

asset finance united kingdomdbdci2xaa31q7.cloudfront.net/images/pdf/wcg_uk_auto_and...keeping up...

Documents