Another busy year for leasing sees Leasing Life take the temperature of the industry, with our annual review featuring the experiences and points of view of brokers, funders and advisers to the market.
Lindsay Town, chair and chief executive, IAA Advisory
We have seen a slowdown in M&A-type activity that drove headlines in 2017. The enthusiasm for M&A arguably drove some heady enterprise values, but after the meal comes digestion, so much effort is focused on settling into new strategies and stakeholders. It is a long-standing truth that the post-acquisition work is harder than first expected. We have seen continuing ‘cheap’ funding and ample liquidity, but with a mixed outlook on risk which has shown divergence in the UK market players. Some have kept a narrow risk tolerance and tight product control; this approach has helped to fuel the growth of relatively new participants and some more creative providers. I see that trend continuing, especially if demand for more complex ‘service contract’ and ‘pay per use’ structures continues to emerge. However, we are beginning to see some strain in risk conditions which will play out over the next few years, especially if debt becomes more expensive and liquidity supply falters. There will undoubtedly be some moments of stress; this could lead to further polarisation of offering and maybe even to consolidation amongst some sectors. The chase for volume continued apace, potentially putting pressure on performance. The result has been a tightening of spreads and possible easing on risk parameters. In my view, a potentially risky trend, but makes the importance of strong risk management more critical. “Digital Transformation” was probably the most used phrase in the year, which goes to the larger goal of “efficiency and effectiveness” where digital plays a key role, albeit not the only major ingredient. However, there is a risk in this enthusiasm in first making sure that one is “transforming” a basically sound business environment! 2018: a fascinating year with some very important themes for the future.
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Ian Smith, chief executive officer, 1pm
Hindsight is a wonderful thing, but we will only be able to give a meaningful verdict on 2018 when we have the benefit of hindsight after the outcome of Brexit negotiations. The year, more than any other, has been played out against a backdrop of uncertainty, yet the leasing industry has progressed, finance products are in demand, businesses are still making capital investment decisions and many sectors of the UK economy are in rude health. So, if a sensible Brexit deal is achieved, there is a chance we will ask: “What was all the fuss about?” It reminds me of the outcome of the Y2K supposed meltdown at the start of the new millennium, which turned out to be a non-event. The difference is that companies, industry bodies and governments all undertook major Y2K projects, spending millions to be prepared for the worst. During 2018, I have not seen the same level of preparation for the worst, at an individual company level, which is understandable because the impact of a no-deal Brexit is more pervasive, more complex and much harder to assess. So if Brexit does deliver a hammer blow to the UK economy, the fall-out could be widespread. I fear we will lament the fact that we reassured ourselves throughout 2018 that all was going to be fine despite the uncertainty, when in fact we could – and probably should – have been doing a lot more to prepare for a prolonged period of lower activity. I hope I am wrong and that the British ‘keep calm and carry on’ attitude was the right call.
George Ashworth, managing director, Santander Commercial Finance UK
We live in interesting times! For 2018 there are five key takeaway points for me: the increasing drive across the industry for capital efficiency, improved productivity, the increasing costs associated with regulatory compliance, the continuing apparent inability of the industry to pass on to end users an appropriate margin over money costs that reflects pricing for risk, and the ending of the most benign environment in living memory with regard to risk costs. From an industry perspective, as the year closes, I see the industry as a ‘curate’s egg’ – good in parts. True to history, the industry is demonstrating a relatively high level of resilience and innovation to the challenges associated with capital efficiency and productivity improvement. We must continue to do so as the proposed changes to the regulatory framework contain the possibility to lessen the attractiveness of asset finance. On the other hand, notwithstanding the lessons of the liquidity crisis, the industry remains relatively poor at improving margins and appropriately charging for risk. With risk costs now rising, achieving target returns on equity will become increasingly more difficult. This is the biggest shortterm challenge the industry faces. The industry is aging. It needs collectively to address the issue of talent and talent management. A personal 2018 highlight for myself was the selection and recruitment of 26 apprentices into Santander, and seeing our first graduates emerge from the new Asset Finance Diploma. The fact is the industry is not doing enough – nor quickly enough – to ensure longevity. Asset finance as a product set is more popular now than at any other time in the past. We need to recognise the window of opportunity and attract and develop more of our own talent, as well as do more to increase inclusivity and diversity. The Leaseurope Conference in Venice was also a key event. Throughout, it tackled the theme of improving efficiency. It was energising to see, meet and listen to so many asset finance people and listen and share their approaches and views on the same issues. Culture is great but, if we are not careful, it can often distort the lens through which we look at the world and business issues that we need to resolve.
Carmen Ene, chief executive officer, 3 Step IT
For us, 2018 has been a year of innovation and growing digitisation, which has started to change the business landscape as companies adopt increasingly automated processes in response to customer expectations. Through the advance of cloud computing and AI, the possibility of more flexible finance and service-based solutions will only grow. At 3 Step IT, we have concentrated on developing our asset-management platform with a strong focus on supporting our customers’ growth strategies. Digitisation is also the driving force behind many other IT finance megatrends such as access over ownership, the impact of climate change and resource scarcity, and the issues around data security and protection. In 2018 it has also meant developing our most important asset: our people. We have started internal programmes to develop the workforce of tomorrow. For us digitisation is an opportunity to develop our people to work in new ways, in more exciting jobs, with robotic process automation removing the need for humans to carry out routine drudgery. And finally, I predict that sustainability will become a deciding factor and requirement for our customers. In a recent study, around 30% of our new customers cited sustainability as a reason for choosing 3 Step IT. Clearly, it will soon not be enough to provide sustainable services, but they must be produced in the most sustainable way.
Mike Randall, chief executive, Simply Asset Finance
Most notably, 2018 has been a year of technological advances, both for our SME customers and the asset finance industry. As a relatively new business with the latest tools and infrastructure ourselves, this is a theme very close to our hearts. We have seen a massive focus on systems that will enable organisations to participate fully in an increasingly digital world. Automation is so important – particularly in our space – but, equally, digitisation can only go so far and does not replace the human interface. So the companies that are forging ahead most are those that have recognised the importance of combining technology with communicating directly to businesses. A strong customer focus will always be vital and is becoming more and more crucial as time goes by. Firms that have made a conscious effort to create a smooth, tailored and ‘enjoyable’ customer journey – generating positive experiences and delivering the best possible service – are being differentiated more clearly than those that have not, especially in an industry that is constantly changing and becoming more competitive. 2019 is certainly going to be a year to watch. An interest-rate increase is on the cards and we could easily see a correction in the marketplace, particularly as we have lived in a ‘false economy’ for the last 10 years – and our exit from the EU might well be a major contributing factor. The coming 12 months – or at least the first half – will be fixated on Brexit – hard or soft – and determining what this will mean to our sector. Clearly it is time to be vigilant, but the one thing we know is that resilience, hard work and a positive approach will stand us in good stead.
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By GlobalDataPeter Alderson, managing director, White Oak UK
It has been a challenging yet stable year for the UK business finance market, which remained steady in 2018 despite the continued uncertainty surrounding Brexit and muted outlook for the UK economy. Encouragingly, the last Budget before the UK’s departure from the EU introduced several initiatives designed to stimulate business investment. These were largely welcomed by UK business leaders, and we are hopeful that this sets the tone for UK fiscal and economic policy after March 2019. It is needed as more recent surveys show a consistent deterioration in business confidence among SMEs. The sector has witnessed a noticeable increase in the number of new entrants over the past year – in the form of new independent platforms or offshoots of established banks – as operators look to deliver a more business focused offering. The subsequent increase in market competition, while giving businesses greater access to capital at more affordable levels, is one to watch carefully.
Innovation in the industry has clearly focused on streamlining the financing process as lending platforms become increasingly digitised. Firms who already have the infrastructure to assess applications efficiently and deliver capital quickly will be well positioned for the forthcoming year, as larger, less-agile organisations manage the lead time associated with establishing technology partnerships or overhauling their policies and legacy systems. Despite the headwinds presented by a potential no-deal Brexit and a tightening regulatory framework, we should be optimistic as we head into 2019. Lenders would be well served to remain sensitive to the market and to the challenges of a new lending landscape. In order to remain relevant, the industry will need to deliver supportive solutions and explore a more diverse offering that meets the market’s changing needs. There is a risk that the focus on volume by many new entrants, which do not yet seem to have profit in their vocabulary, will create unsustainable risk-reward economics. Experience shows that this, while it may be good for providers and businesses in the short term, can have severe longer-term ramifications. We do not want to go back there again.
Jo Davis, head – asset and consumer finance, Locke Lord
He’s making a list, he’s checking it twice, he’s going to find out who’s naughty or nice, Santa Claus is in contravention of article 4 of the General Data Protection Regulation (EU) 2016/679. GDPR will be the abiding regulatory memory of 2018 for many; however, it was just one acronym consuming firms’ time and resources. Firms have also been dealing with SMCR and, as we move into 2019, is the acronym most likely to consume the time, patience and stamina of many a compliance and legal department as we move into the new year. The FCA’s review into the Motor Finance market could also yield one or two shocks in 2019. Its work on commission arrangements between funders and brokers in this market could ruffle quite a few feathers. We have already seen from the FCA’s finalised guidance in respect of internal remuneration and incentive structures that what were once long-established practices are no longer acceptable. Will the FCA look to extend these requirements seen for internal structures to external relationships with third-party brokers? And finally, does FOS know precisely what it is letting itself in for by expanding the scope of eligible complainants to very much cover the ‘M’ element of the SME market? We will see?! As importantly, are firms prepared to deal with their SME customers being able to refer complaints to FOS? Come 1 April, which seems apt, we will find out!
Andrew Gadsby, finance director, PEAC Finance
2018 has seen political and economic headwinds with the cessation of QE programmes, inflationary pressures, and the start of rising interest rates. The construction industry, so important to the UK economy and asset finance, has had tough times, impacted by austerity measures. We also have seen overseas and political agendas drive tensions through trade tariffs. The government is signalling the end of austerity, but Brexit negotiations dominate the political and business climate. Uncertainty is a constant, with Sterling the barometer for Brexit negotiations. Despite the above, UK plc has surprised on the upside since the Brexit referendum when many predicted a ‘cliff-edge’ economic decline following a leave vote. FLA statistics suggest a shift from operating lease to finance lease/HP. The broker channel has grown strongly while the direct and vendor channels remain resilient. Assets funded are stable across P&M, commercial vehicles and business finance, with modest deterioration in car finance and a drop-off in aircraft, ships and rolling stock. The outperformer is IT equipment up 24% year on year (admittedly up from a lower base in recent years). While we have experienced volumes increase, the trend for ‘as-a-service’ in a range of assets looks set to continue. Regulatory scrutiny grows and price competition remains fierce. There is real concern about whether the market is properly pricing for risk. The outlook remains strong, but the way in which business is conducted is changing and firms cannot differentiate themselves on price alone. Increasingly, success will be determined by quality of service and speed to market. Customers will reward firms who adapt to the modern digital economy through investment in product development and technology.
John Bennett, independent leasing consultant, JB Associates
FLA market data indicates 5% growth in total volume for 2018 – a decent performance considering the recent decline in business investment, and the below-average GDP growth forecast for the year. Brokers have, again, topped the market channel growth league, with a 10% increase on last year; competition from the direct and vendor/sales aid channels was poor this year. In terms of asset class, the star performer was IT equipment, up more than 20% on 2017, an rise significantly higher than I predicted a year ago. Corporate spending on cybersecurity has been a key driver. All other major asset classes have recorded only marginal gains or losses in growth rates, and 2018 was unusual in having only one asset type with a significantly different growth rate from the rest of the market. Despite relatively buoyant new business volume, 2018 was not without challenges for funders. The increased flow of capital into the market, especially towards the broker market, has inevitably resulted in downward pressure on margins. Although certainly not reaching distress levels, an emerging trend towards higher arrears and credit losses was also an issue for SME funders. 2018 may prove to be a turning point when the benign portfolio performance figures of the previous decade return to long-term trend levels. Achieving acceptable risk-reward pricing will continue to be a major challenge in 2019. For me, the most significant event of 2018 was not market-related, but people-related. The first group of 30 students graduated with the Diploma in Asset Finance (Dip AF). This long-overdue new qualification is provided by the London Institute of Banking and Finance on behalf of the FLA. Dip AF has a business-focused curriculum, at the level of university year two, and is designed to increase levels of expertise and professionalism throughout the industry. It will help to ensure that the next generation who will shape the future of asset finance are equipped for the task.
Stuart Hughes, head, broker sales and broker manager, North West, Investec
While 2018 certainly brought its own specific challenges, the asset finance industry as a whole had a strong end to the year – something we see continuing into 2019.
Competition in the industry has been fierce, accelerated through new market entrants who see asset finance as an attractive investment opportunity. In addition, the glut of liquidity in the market has driven market movement in both credit appetite and margin, resulting in a race to the bottom. This is a challenge for all sensible funders in our industry. The effect of the increased liquidity and flexibility around risk appetite manifests itself as a positive for customer outcomes, more choice, easier access to capital equipment financing and – in theory – an overall better deal.
Uncertainty surrounding Brexit seems to have created a headwind for the wider economy, let alone the asset finance industry. Our outlook, however, is positive. In any scenario, we will have clarity on the UK’s relationship with the EU by the second quarter of 2019. Irrespective of the outcome, our view is that once Brexit is out of the way, businesses can revert to making decisions with certainty and investing in their futures. In terms of our business, we have been able to further grow through 2018, especially in the hard asset market. This has largely been achieved because of the value that the broker community attributes to our consistent level of service, so even if Brexit leads to slowing markets, we are confident that we will again step up and provide market-leading service to broker partners when they need us most, just as we did last time around!
Patrick Jelly, commercial director – asset finance, Aldermore
The asset finance industry has remained resilient in another year of Brexit uncertainty, the introduction of GDPR and an interest-rate rise. These challenging economic conditions, as well as an ever-changing regulatory landscape, have not dampened SMEs’ enthusiasm and we have continued to see them invest and grow their businesses. In fact, SME investment has outpaced the large corporates in the last five years, with market confidence and growth within the FLA broker sector also apparent.
It has been another milestone year that has seen us continue to lend £1bn to support SMEs over the last year. Competitive spirit is also rising – market consolidation and available liquidity have created more rivalry than we have previously seen. And as we know, more market players leads to increased innovation. Technology is starting to shape the market in which we operate, with many of our customers and partners looking through the lens of Amazon or Apple when they assess the service propositions on offer. The sustained rise of fintechs will likely have a bigger and more impactful role as customers demand faster, bespoke service offerings.
Our latest Future Attitudes survey found that over three-quarters of business owners are confident that they will be able to access the funding they need to grow over the next year, but are unsure around what type of product best suits their business. This tells us that we must continue our efforts to get under the skin of UK small businesses and provide bespoke finance solutions for all stages of the SME lifecycle.
To ensure that our successes continue, we understand the need to be bold – but then, that is part of our very foundation and DNA.
