2018 has been a busy year for the consumer motor finance market. Motor Finance spoke to industry leaders to see what they saw as the biggest challenges – and benefits – of the year gone by.
John Hughes, Managing Director, Mann Island Finance
2018 has seen Mann Island Finance firmly embed its unique proposition of having the power of a lender coupled with the flexibility of a broker.
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This breadth of product and expertise has a real place in the market, especially in helping our dealers recognise the potential in the fast-growing SME market for cars and LCVs.
On a wider basis, dealer finance has adapted to issues raised by the Bank of England and the FCA to ensure that risk assessments in respect of lending and residual value setting are appropriate.
I recall that some in the industry, after the rapid growth of PCPs, suffered from overly ambitious guaranteed minimum future values; such detriment across the industry is to nobody’s benefit.
Today, a series of unique circumstances mean that caution in residual values is very definitely appropriate.
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By GlobalDataConcerns surrounding diesel cars, the legacy impact of the Worldwide Harmonised Light Vehicles Test Procedure (WLTP) and the potential for local toxin taxes, are also not to be ignored.
On its own, WTLP has created new carsupply issues and stalled some fleet-buying activity; the result in the remarketing channels has seen demand outstripping supply. Even the price of used diesel cars has risen!
As an ambitious and imaginative lender, we will continue to do all we can to create a proposal acceptance that customers can afford. However, across the industry, we must also take a long-term view.
The future of dealer finance is increasingly going to be about lifetime value. To secure this, motor finance needs to treat customers, and its own P&L fairly.
2019 may well spell further Brexit uncertainty, the likelihood of base rate rises, and new standards of customer care from the FCA’s forthcoming motor finance review. In such conditions, prudent ambition will be our watchwords.
Philip Nothard, customer insight and strategy director, Cox Automotive UK
2018 has been a turbulent year for the UK automotive industry, with unprecedented levels of uncertainty presenting challenges in both the new and used car markets.
Two of the biggest factors affecting the industry are the impact of Dieselgate and the lack of clarity around Brexit.
As pressure mounts within the new car market, and with registrations in steep decline, we have seen an appetite for retailers to invest and focus on growing their used car operations, a trend that is predicted to continue into 2019.
The used car market has also benefited from the changing model of ownership, with PCP and PCH becoming far more prevalent.
Looking ahead to the first quarter of 2019, we are more optimistic about the health of the automotive market, as the challenges driven by WLTP are addressed by the industry.
Brexit will remain a key issue that the industry will be monitoring with keen interest.
The rising cost of fuel continues to be a huge dilemma, with consumers facing ever-increasing prices, and company car drivers facing significant changes to Benefit-in-Kind taxes.
Growing demand for hybrid models means dealers are going to have to plan carefully when investing in forecourt stock.
The introduction of hybrid and electric models, especially over the past five years, has changed the way buyers think about different forms of fuel. This makes sourcing the right vehicle types that will sell more important than ever.
The most successful businesses will be those that look for new, innovative ways to operate. Digital marketing will increasingly play an important role in the automotive industry.
We will be working closely with all our customers to help them navigate through these changing times, ensuring they can sell more effectively and remain profitable.
Karl Werner, divisional chief executive officer – motor finance, MotoNovo Finance
2018 has seen a continuing acceleration in the digitisation of motor retailing and financing, and I’m very proud to reflect that MotoNovo Finance has been at the heart of digital innovation with the launch of findandfundmycar.com – a dealer-friendly disrupter designed to disrupt the disrupters!
The appeal of the motor retailing and financing sector to disrupters is clear: finance alone is a £44bn market, representing over a third of total new consumer credit written in the UK.
In spite of some margin erosion, there are plenty of players ready and prepared to attack this market. Dealer stock is a crucial lever that some are using to gain access.
Eighty percent of consumers need finance to change car, and dealers need finance to create buyer interest and sales; the issue for dealers is how can they adapt to the growing competition they now face for the attention of would-be buyers?
Manufacturers are adapting to change by going direct in the sale and financing of cars; Ford and Volkswagen have announced such plans, and they are not alone. In the used market, dealers also need to adapt and assess their distribution channels.
Falling new car sales, manufacturers going direct, diesel concerns and the WLTP are all creating pressure in used car retailing.
Trade demand for quality used stock is exceeding supply, and more players want a slice of the action including; stock supply and distribution, the part-exchange process, finance, pricing and access to the customer. findandfundmycar.com does not compete with dealers; it collaborates with them, promoting and curating their critical tool – their stock.
Without easy access to a dealer’s stock, some disrupters will struggle. By making better use of their stock, dealers can benefit, making inroads into the 70% of people who today use other forms of finance to buy their car.
Dealers have an increasingly clear choice: continue down today’s path, or seize control of their future. In the latter, we believe findandfundmycar.com can play a vital role.
Mel White, Business Development Director, jigsaw
2018 has seen an intense level of competition for motor finance, and dealers have had an increased level of choice as a result.
That said, many established lenders have tightened their underwriting, and marginal cases have been more challenging as a result. I’m struck that this credit tightening finds both dealers and their customers facing up to problems getting credit, an oftperceived right for many.
Another issue that has gained momentum is ‘churn difficulty’ for PCP customers. In common with the credit access ‘right’, some customers are used to changing their car finance via a PCP every two or two and a half years.
They did so by moving to a new car, sometimes with a higher specification with a similar monthly payment. Today, this is significantly less likely.
Rising car prices, higher base rates and more conservative GFVs are seeing monthly payments increase.
Also, with a greater focus by finance companies on affordability, customers willing to stretch to a higher rental may not be allowed to do so. Increasingly, dealers are looking to brokers to identify a source for such business.
With our broad lender access, Jigsaw works to create a finance package that satisfies all parties. However we, like our lenders, have to act responsibly – not everyone who was financed previously is financeable today.
Into 2019, I am sure the market will remain cautious, which means that brokers such as Jigsaw will be working harder than ever to ‘match-make’ the growing number of complex deals.
Oliver Mackaness, director, Billing Finance
I haven’t been replaced by artificial intelligence (AI) just yet, but I do have concerns this may happen soon.
We inhabit a world where people are constantly staring at screens, want everything now, and hate the idea of delay.
Many people don’t even like the idea of having to talk to a person. In our industry, there is real pressure for instant lending decisions, e-signed documents, customer self-service portals, chatbots and a raft of different payment options.
However, there is a flipside to this desire for ease and speed: we still have to consider foreseeable affordability, vulnerability and the safety of customer data, and provide finance for the more challenging, non-prime market.
At Billing Finance, we can’t and won’t rely on AI for such things. Next year, we have the new Senior Managers and Certification Regime to contend with.
It is a shame that we need this kind of regulation, as I believe it should be a given that senior managers run their companies ethically and appropriately. It is too easy to hide behind technology and I, for one, will not be able to blame complicated algorithms and formulas for any bad lending decisions.
Automation is necessary for any company to compete, but efficiencies should not produce bad outcomes and, ultimately, it will continue to be my head on the block – and not my avatar’s – if we mess up!
Shamus Hodgson, Managing Director, MoneyBarn
We’ve had strong, relentless growth across the industry for many years, and while growth is clearly still out there, 2018 has felt like we might be moving into a slightly different phase of the cycle.
The ongoing effect of the emissions scandal, the recent impact of WLTP, and the general consumer unease caused by Brexit are all examples of market volatility that we haven’t seen in such a consistent way for several years.
Having said all that, 2018 has once again proved to me what a robust and adaptable industry we work in.
Across the industry, lenders and brokers are reporting continued growth and seem to be feeling positive about the future.
I share that positivity. Another positive feature of 2018 has been that the FCA is clearly becoming more familiar with our industry, and the update on the review of the motor finance market published earlier in the year gave many people confidence that the final published review would see the industry for what it is – well run, customer-focused, and willing to adapt where required.
Continuing on the regulatory theme, while the introduction of GDPR has meant a significant amount of work across the motor finance industry, it again evidences the industry’s ability to successfully manage change.
I am pleased to say that 2018 has been another very good year for Moneybarn. We are providing finance to more customers than ever, and have continued to improve the service we provide to both our customers and broker partners.
I am particularly happy that our growth has meant we continue to bring new, talented people into the industry. Given the great uncertainty that is Brexit, or rather the impact of it, it is hard to predict how 2019 will play out.
Whatever the year brings, those companies that continue to centre their business around meeting customer needs will be the ones who succeed. Even in times of great change, some things will always remain the same.
Shaun Harris, commercial director, Codeweavers
Go back nearly 15 years to 2005, and the FLA presented research that indicated that while 80% of car buyers needed finance, less than half of this number chose the dealer as their finance source.
Today, a little under 90% of private new car buyers use dealer finance; it is an impressive figure that has been driven by meeting car buyers’ need for affordability.
The breakthrough I see in 2018 has been the move to make finance online easier and more engaging for car buyers. This, in turn, has created better data and better customer experience.
It also creates a platform for finance providers to monetise the value of consumer data to develop a true lifetime value model by making it easier for buyers to choose them and their finance – and to keep doing so; the emergence of PCH is a clear signal of this developing approach.
Impressive moves in new car finance need to be replicated in the used car market. The sector lags behind new car finance with a penetration of around 30%.
There are structural reasons for the modest penetration, but if dealer finance fails to make inroads, others could. Used car retailers need to adopt the price point lesson.
Our research suggests that the monthly budget for 55% of used car buyers is £200-300; retailers must bring this affordability to life and make the whole buying process easy – it all starts online.
Rupert Pontin, Director of Valuations, Cazana
The industry has seen some major changes over the last year that have had a significant impact on the shape of both the new and used car markets.
The discussion over diesel power remains somewhat misreported, and the significant decline in sales was cause for concern.
However, the benefit was the improvement of hybrid and electric vehicle sales, although the October reduction in government grants will hurt sales of hybrids going forward.
The introduction of WLTP must have been one of the most challenging periods in the industry in recent years. With a push to register pre-WLTP models affecting new car sales patterns, post-August new car supply was seriously affected as OEMs struggled to build new engines to meet legislative and commercial needs. For some companies, this will affect new car availability well into 2019.
Conversely, the used car market was bolstered by disruption in the new car market and remained particularly buoyant all year, assisted by creative used car finance and realistic PCP packages.
Although consumer confidence has been low, the used car market has seen retail pricing strengthen due to consumer demand and constrained supply as a result of the new car market reduction.
Used car stock levels were variable, and often not quite good enough to meet demand, which resulted in a margin reduction for many dealers as they fought to find quality used car stock.
In such a complex market there is a need for top-quality insight, and real-time data for pricing and market intelligence has become invaluable.
Using unedited retail-driven insight has facilitated more accurate forecasting for financial institutions, improving accuracy and increasing the opportunity to write better, more profitable business.
Spencer Halil, director, Alphera Financial Services
While 2018 will end up as a more positive year for most than we might have expected given declining registration figures, WLTP, Bank of England rate increases and concerns over reducing diesel demand, for me this has not been the most interesting aspect of the year: it’s the year’s developments in regulation that continue to be the big story and have the most potential to shape our industry in the future.
June saw the FCA publish near-final rules on the extension of the SM&CR to all regulated firms – including those within the motor industry.
The regime comes into force in December 2019, and extends the principle of prescribed responsibilities and personal accountability of senior people beyond the current approved persons, bringing with it an extension of ‘fit and proper’ checks and the establishment of a public register of certified roles.
There are many aspects to this change – some logistical, but most cultural – for which firms will need to prepare; they will need to start thinking about how it affects their business well in advance of the implementation deadline if they are to make the transition seamlessly.
Potentially more significant, the FCA is due to publish its full review of the motor finance sector in November.
What it has given so far are its areas of interest and focus – enough to let us know the final report could have far-reaching impacts.
It is expected to focus on four areas: the culture of firms; affordability and how dealers and lenders make assessments; business-to-business (read ‘lender-todealer’) incentivisation and how it affects selling behaviour; and clarity and accuracy of POS information.
While we can be pleased with the industry’s progress in these areas over recent years, only the complacent would claim the work is finished. It is inevitable that the FCA will find areas where we could accelerate the rate of change. 2019 will be interesting – and busy!
