| THE VALUE FOR MONEY OFFERED TO CUSTOMERS OF THE MOTABILITY SCHEME
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| (a) Charges to customers
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| C&AG's Report, paras 1.3-1.4 and Figure 3
| 5. At the end 1995 over 246,000 disabled people were leasing, or buying on hire purchase, cars or wheelchairs through the Motability Scheme. In 1995 disabled people made rental and hire purchase payments to Motability Finance Limited totalling £431 million, of which £376 million was met from their benefits and the remaining £55 million mainly from their own resources.
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| C&AG's Report, paras 1.14, 3.21 and Figure 11.
| 6. Motability Finance Limited, the Scheme's service provider, manage the business and the customer's individual agreements. They set the price of each new agreement, so that it reflects the main costs of providing the particular vehicle concerned at that point in time. The only costs not included are Motability's own administration costs, which are met by grants from the Department.
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| C&AG's Report, paras 2.2, 2.5-2.6 and 2.9, and Figures 8 and 10
| 7. Due to its unique characteristics it is not possible to compare the Motability contract hire scheme directly with the market. Nevertheless some benchmarks can be established. At the time of the examination carried out by the National Audit Office, the scheme offered vehicles at a price significantly lower, by an average of 30 per cent, than those offered by other contract hire companies to large fleet operators. After adjusting for reliefs from Value Added Tax on rentals and on the disposal of vehicles, the Scheme's price advantage over other companies averaged 10 per cent.
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| Q 3
| 8. Our predecessors asked Motability how they made sure that they obtained the best terms in the light of their strong market position. Motability said that they were now responsible for close to six per cent of the United Kingdom new car market. In their view, value for money was ensured by the way Scheme regulated itself, and market forces determined the price of the vehicles they provided.
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| Qs 61-66
| 9. Our predecessors asked whether most of the price advantages derived from the tax reliefs on Value Added Tax the Scheme enjoyed. Motability confirmed that the benefits of the tax concessions were included in the Comptroller and Auditor General's comparison of prices. They added that the price comparisons with other lease hire companies were valid because from August 1995 they all enjoyed the same tax break at the front end of their leases.
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| Q 29
| 10. Our predecessors asked Motability how they assessed whether the terms of the hire purchase schemes represented good value for money. Motability said that they had benchmarked the hire purchase scheme against other hire purchase companies in the market, and they considered that their scheme was competitive, although not overly so. The real advantage of their scheme was that it provided hire purchase arrangements for people who would not have had a credit rating with any other hire purchase schemes.
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C&AG's Report, para 3.67
Q 26
| 11. Benefit recipients who choose to buy wheelchairs through Motability on hire purchase enjoy a five per cent discount on the retail price. Our predecessors asked Motability why they could not negotiate better discounts. Motability agreed that they could achieve higher discounts, but at the expense of quality of service. In Motability's view, their scheme provided a quality of service which was second Qs 14-17, 104-106 and Evidence, Appendix 1, page 25,para 106to none. They were far more concerned to ensure that if a wheelchair was unsuitable it would be taken back by the wheelchair dealer, and considered that this explained why their scheme did not attract such large discounts as those obtained by some of the disability organisations.
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| (b) Costs of finance
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C&AG's Report, paras 9 and 10
Qs 9-10
| 12. In 1977 Motability sought the assistance of the six major United Kingdom clearing banks to establish the Scheme. At September 1995 the banks' total investment in the Scheme was £1,263 million. Our predecessors asked how Motability ensured that they received the best possible terms available from these banks. Motability stated that since the inception of the Scheme in 1977 the return which the banks were able to take had been strictly regulated by the Governors of Motability.
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C&AG's Report, paras 3.37-3.40 and Figure 13.
Qs 54-55
| 13. The banks' profit margins reduced steadily from November 1992, from 2 per cent to 1.25 per cent by October 1994. Motability told our predecessors that they had decided, in August 1995, to commission a merchant bank, recommended by the Bank of England, to review the cost of money and the banks' profit margin.
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| C&AG's Report, para 3.39, Evidence, Appendix 3, pp 28-38
| 14. The merchant bank recommended a benchmark for the profit on lending to the Motability contract hire scheme. They recognised that the margin did not take into account the banks' open-ended commitment to provide tax capacity and general support to the scheme, and concluded that, if formalised, the commitment would justify a premium on top of the benchmark rate. The review helped Motability negotiate a reduction in the banks' profit margin to one per cent for all contract hire agreements entered into from January 1996.
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| Qs 10-11, 84 and 114-119
| 15. Our predecessors asked Motability whether they could obtain money more cheaply. Motability confirmed that, if they were able to go elsewhere more cheaply, they would certainly do so. They were very keen to see whether there were areas for competition, particularly in the provision of finance, where they could make greater savings and pass the benefits on to disabled people. They added though that there were not a lot of people who were willing to lend Motability £1 billion at the inter-bank lending rate. As regards the scope for competition, Motability said that a review was on-going and they hoped to have the next part completed in July 1997.
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| Q 30
| 16. Our predecessors asked Motability whether the banks' commitment to provide general support and tax capacity to the Scheme had been formalised. Motability told us that their lawyers had drawn up, with the banks, a deed of covenant covering the ownership of reserves and also the commitment of the banks to support the Scheme. The deed of covenant was with the banks for signing.
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| (c) Reserves |
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C&AG's Report, paras 30-31 and Figure 11
Qs 17 and 137
| 17. Since the late 1980's the Motability Scheme had built up reserves which exceeded the amount the banks considered necessary to safeguard the Scheme. At the end of September 1995 surplus reserves amounted to £26.9 million. Our predecessors asked Motability what the surplus reserves were for and why they had arisen.
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Evidence, Appendix 1, page 25, para 106
Qs 21-24
| 18. In a note, Motability explained that the reserves required to be retained in the Scheme had been calculated to meet contingencies such as increases in rates of corporation tax or interest rates over the life of a lease; potential supplier failure; the effects of inflation; and failure to achieve vehicle residual values at the end of the lease. They noted one case, involving the Scheme's insurer, Municipal Mutual Insurance, which collapsed and went into receivership in the early 1990s. This had cost the Motability Scheme £1 million but it might have cost well over £40 million had the Governors not gone to the insurance compensation board.
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| Qs 14-17, 104-106 and Evidence, Appendix 1, page 25, para 106
| 19. Motability said that the accumulated reserves had built up over several years. Each year Motability reviewed the adequacy of the contingency reserves with Motability Finance Limited. The balance of £26.9 million was what remained from the accumulated reserve after the £19.3 million deemed necessary by the banks to meet these contingencies had been retained.
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| Qs 130, 137-138
| 20. Our predecessors asked Motability why the surplus reserve had more than doubled from £11.7 million to £26.9 million in the 12 months to September 1995. Motability said that the increase arose partly because the Scheme grew by 25 per cent over that period. This had increased the number of vehicles coming on to the Scheme and even a small surplus had been magnified quite widely. Motability agreed that in retrospect it could be said that disabled drivers had been charged slightly too much at that time.
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| Qs 17-20, 131-135
| 21. Motability stated that following their latest review, they no longer had a requirement for this £26.9 million. This sum was now going back through reduced lease payments, at a rate of £80 per lease per year, to those people who had entered a new contract hire agreement after April 1996. Motability claimed that they were passing back surplus reserves as soon as they could: they first had to review the profitability of the banks at the end of the financial year; to see what the banks' business predictions were for the forthcoming financial year; and to take a view on whether reserves were surplus or should be retained for business purposes.
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| C&AG's Report, paras 1.29, 3.53, and Appendix B
| 22. Surplus reserves generated between 1989 and 1995, were transferred to the Motability Tenth Anniversary Trust Fund. The Trust is a separate independent charity, which provides Motability with charitable funds. There was £35 million in the Tenth Anniversary Trust Fund at September 1995 but only £1.3 million was provided to Motability to meet their charitable purposes in 1994-95.
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Qs 144-145 and 153
Qs 32, 158 and Evidence, Appendix 3, page 28, para 4
| 23. Our predecessors asked Motability what was happening to this £35 million. Motability said that it was capital which would generate the interest from which they would make grants to meet the needs of their beneficiaries in future. Motability added that they had just undertaken a major review of the Trust, and what demands they believed would be made over the forthcoming five years. As a result, the Trustees of the Tenth Anniversary Trust were happy that they had sufficient capital to meet the immediate needs of the Charity as far they could foresee them.
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| Q 107
| 24. At September 1995, Motability Finance Limited also had £5.5 million of reserves. Our predecessors asked why these were needed. Motability said that the reserves had been held as provision against a downturn in the second-hand car market. Three years ago Motability Finance Limited were making quite significant losses when they sold second-hand vehicles at the end of their lease. Since then the disposal of second-hand vehicles had been a `profitable' business. Motability added that there was work under way on just how the residual value of the vehicle should be set, and how the residual value should be altered to reduce the margin earned on the disposal of vehicles.
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| (d) Quality of Service
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| C&AG's Report, para 4.3
| 25. Since 1994, Motability have taken steps to improve the services provided to disabled people. However, the Comptroller and Auditor General reported that Motability did not measure systematically the quality of service provided by either themselves or Motability Finance Limited and their other suppliers. And while, Motability had increased the information provided to customers on the operation of the Scheme, the Comptroller and Auditor General concluded that more could be done to inform customers about the performance of both Motability and Motability Finance Limited.
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| Qs 3 and 280-281
| 26. Our predecessors asked Motability what they had done to put in place regular, effective monitoring of the Scheme. Motability said they had formal ways of regulating each of the service providers to the Scheme: the financial service providers and the motor manufacturers. They also had standards in place for the motor dealerships who dealt with disabled people and formal contracts with the providers of insurance services and breakdown services, which also included service standards.
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| Qs 280-281 and Evidence, Appendix 2, page 27, question 3
| 27. Motability added that the whole of the Scheme was now being pushed down a totally customer focused line under an initiative called Customer First. This applied to both Motability and Motability Finance Limited, and had four major thrusts to it. Motability had set in place proper targets, were monitoring against them and were reporting to disabled people in their quarterly magazine-"Lifestyle". They were looking at the supplier aspect, at whether the dealers were attuned to disabled people's needs. And they were monitoring what was going on, for example they had set up a contract with the Bullmersh group, part of NOP, to go out to Motability's customer base to find out what they thought about the Scheme, and to undertake quantitative analysis. When this had been completed, they would be monitoring their customer base on a regular basis, to see what they thought about Motability, whether Motability was meeting their needs and how they would like to see the Scheme develop.
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| Evidence, Appendix 2, page 27, question 3
| 28. Our predecessors asked Motability whether they agreed with the view expressed by the Director of Banstead Mobility Centre that Motability need to involve the entire range of service users in the Scheme to build up mutual trust and respect. They told us that the Banstead Director's comments were probably made before she was aware of Motability's "Customer First" programme.
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| C&AG's Report, para 4.11
| 29. Some customers experienced delays and confusion because of the split in customers service responsibilities between Motability and Motability Finance Limited. Our predecessors asked whether Motability could take responsibility for all customer help line services.
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| Qs 35-37
| 30. Motability said that since the Comptroller and Auditor General's Report they had taken steps to differentiate between the two bodies, and to inform customers through their "Lifestyle" magazine clearly about those circumstances where they should contact Motability and those where they should contact Motability Finance Limited. Both bodies were also keeping records of calls coming in-Motability and Motability Finance Limited each received about 35,000 calls a month. Calls to Motability Finance Limited tended to deal with contractual agreements. Those to Motability tended to seek general information about the scheme or to complain, which was right, as Motability was responsible for the entire Scheme and if any of the service providers fell down on the job, then people should come to Motability for redress.
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| C&AG's Report, paras 1.26, 4.18 and Appendix C
| 31. The Mobility Equipment Fund provides grants to help the disabled obtain a vehicle which will carry a severely disabled passenger and/or obtain a vehicle which can be driven by a most severely disabled person. Motability made grants totalling £2.7 million in 1994-95. Until March 1995, Motability took an average 12 months to give applicants a decision on their first grant from the Motability Equipment Fund, and this period had increased to 18 months by September 1995.
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| Qs 38-39
| 32. Our predecessors asked what could be done to improve waiting times. Motability said that the Mobility Equipment Fund was a special fund set up by the Government some five years ago. Because the Fund was the most severely disabled, and the solutions were extremely complex, there was a long period, probably eight to ten months, while medical opinions were obtained, people were properly assessed, and vehicles were trialled. Motability accepted though that they could reduce the waiting time to 12 months.
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| Conclusions |
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| 33. We note that, as at the end of 1995, nearly a quarter of a million people were obtaining cars or wheelchairs through the Motability Scheme. We note that at January 1996 the contract hire scheme's prices were some 10 per cent lower than the prices of other contract hire companies to large fleet operators, and that Motability consider that the real advantage of their scheme is that it provides hire purchase arrangements to people who would not have a credit rating with other schemes.
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| 34. We recognise the value for money of the services provided by Motability, and we look to them to ensure that Motability Finance Limited use their considerable purchasing power to drive the best bargains they can for disabled people.
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| 35. We note that Motability offer a five per cent discount to those who buy wheelchairs through their scheme, and that they consider that they could achieve higher discounts only at the expense of quality of service. We recognise that there is a balance to be struck between prices and quality, and we urge Motability to intensify their efforts to secure more competitive prices while maintaining the high quality of the service they provide.
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| 36. Motability consider that their long-term relationship with a partnership of six banks has provided stability in meeting their funding requirements. In a scheme such as this, it is clearly important for Motability to demonstrate that they have been robust on their customers' behalf in their dealings with the banks. We therefore welcome Motability's decision in August 1995 to employ a Merchant Bank to benchmark the cost of finance and the banks' profit margins, particularly since the same six banks have been involved with the Motability Scheme since its inception in 1977. We note that the merchant bank employed by Motability to investigate the scope for increasing competition was due to produce a further report in July 1997, and we look to Motability to respond quickly and positively to any opportunities for increasing the level of competition among banks.
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| 37. We note that reserves of £86.7 million [1] had been accumulated. Of that £35 million, mainly from surplus reserves, is held and invested by the Motability Tenth Anniversary Trust Fund to generate charitable income for Motability. We also note that Motability are now using further surplus reserves of £26.9 million to reduce the cost of individual contract hire agreements entered into after April 1996. We are concerned that the Motability Scheme has generated substantial surplus reserves of £61.9 million [1] from the charges levied upon users, over and above the reserves of £19.3 million deemed necessary by the banks of safeguard the Scheme. We note that this meant that they had taken money from one group of disabled people and were using it to subsidise another. We urge Motability to ensure that if surpluses are generated in the future, they are identified and distributed as quickly as possible to those customers who contributed to them. We are surprised at these shortcomings, when Motability has been in operation for such a long time.
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| 38. We note that Motability Finance Limited itself held additional reserves of £5.5 million from selling second hand vehicles at prices which have over the last three years exceeded those they had predicted. We look to Motability to progress as quickly as possible the review of the level at which Motability Finance Limited set residual values for vehicles, thus ensuring that the charges levied on users are minimised.
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| 39. We note the steps taken by Motability to strengthen their management; to establish quality of service targets and to publish performance information which covers all providers to the Scheme; and to focus more directly on the needs of the customer and to seek customers' views regularly. We were surprised that such action had not been taken earlier in this Scheme's many years of existence. We look to Motability to build on the steps they have already taken to seek wider opportunities to get direct feedback from their customers.
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| 40. We are concerned that it takes so long to take decisions on grants from the Mobility Equipment Fund, and that waiting times have deteriorated from 12 to 18 months. We look to Motability to bring the waiting time back to 12 months quickly, and then to seek ways of reducing it further.
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