The government-supported car finance funder for welfare users has made a huge unplanned profit through its car leasing scheme. Brian Cantwell looks at criticism levelled at it by MPs and the National Audit Office (NAO).
The UK government’s Motability charity scheme generated £1.05bn in unplanned profit between 2008 and 2017, according to an NAO report.
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The state-supported welfare charity, which offers three-year leases on cars with a 60,000-mile limit, and competes with the private motor finance market, was projected to make a £1.14bn profit between 2008 and 2017, but actually generated £2.19bn. This included the overcharging of customers by £390m in that period.
The NAO said Motability Operations, the charity’s business and operations wing, had chosen a more prudent risk-management approach than other car leasing companies, despite its overall business risk being lower as a result of the competitive advantages afforded through government support.
The NAO said Motability Operations had taken on more residual-value risk in 2002 by assuming responsibility for selling ex-lease vehicles and taking on the majority of its fleet insurance risk, but that this had been limited by the significant advantage of government support; this support included the overall business risk being managed as part of the scheme, as compared to other companies.
However, the NAO said the advantages of government support outweighed the disadvantages, and that “while Motability Operations’ prudent approach may have been appropriate while the business was changing, it was less justified given its ongoing success”.
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By GlobalDataOther NAO findings included:
- Motability Operations’ prudent approach means it is holding more reserves than other car leasing companies. As of 31 March 2018, Motability Operations held £2.62bn in reserves;
- Remuneration for Motability Operations’ executive directors has been generous and linked to performance targets set at levels that have been easily exceeded since 2008;
- Total remuneration for Motability Operations’ executive directors is forecast to fall from 2019, but annual bonuses have continued at near-maximum levels;
- In 2016-2017, the Motability remuneration package for its chief executive hit £1.7m;
- The total value in September 2018 of an additional bonus scheme owed to chief executive Mike Betts, designed to keep him in the role on a long-term basis, was £1.86m and was not yet paid. Of this, only the initial allocations of £258,000 had previously been disclosed; and
- In 2017-2018, Motability Operations made a charitable donation of £400m to Motability, possible in part due to its beyond-target financial performance.
Criticism and fallout
According to the BBC, chief executive Mike Betts will step down in 2020 after the long-term incentive pay of £1.86m was revealed.
MPs have attacked the remuneration and failures of governance, citing vulnerable customers being overcharged and highlighting the large cash reserves that the business generated.
NAO head Amyas Morse told the BBC: “Motability Operations has taken an unnecessarily conservative view of risk, holds more in reserves than arguably it needs, and has also made large unplanned profits.
“On top of which, there has been an internal view of executive performance as being ‘consistently extraordinary’, with the reward to match.”
Morse also questioned whether Motability’s governance and accountability arrangements were sufficiently robust.
Analysis
The Motability charity and business has long been viewed sceptically by the motor finance industry as a state-sponsored competitor that enjoys a credit rating (A+) only rivalled by BMW and Honda due to its government backing.
It is seen as depriving private businesses of potential market share, and the large cash reserves and generous remuneration of its chief executive will not help this perspective.
Despite the controversy, Betts will not stand down for another two years, while the NAO’s suggestions for improvement will still take time to take effect. With Brexit around the corner, some in the motor finance industry might question the legitimacy of a flush state competitor if delinquencies rise and margins are threatened.
At a Treasury Select Committee hearing in January 2019, the executive of the charity and the operations wing of Motability were separately interviewed by MPs. While the scheme was seen as a step forward for the provision of mobility for the needy and a worthwhile scheme and charity, MPs heard from NAO head Morse that it needed more muscular governance in order to maintain and review standards.
While the scheme fills a gap in welfare provision from the government’s point of view, the motor finance industry will be looking at the unplanned £1bn surplus profits and wondering whether this was business the private market could have provided.
