Memorandum submitted by the Finance and
Leasing Association
THE IMPACT OF GOVERNMENT'S AUTOMOTIVE SUPPORT
PACKAGE
INTRODUCTION
1. The Finance and Leasing Association (FLA)
is the main representative body for motor, asset and consumer
finance providers. Our motor finance members include subsidiaries
of banks, the finance subsidiaries of motor manufacturing companies,
and a range of independent firms. The FLA welcomes the opportunity
to provide evidence to the Business and Enterprise Committee's
Inquiry.
THE MARKET
FOR MOTOR
FINANCE
2. Over half of all new cars are purchased
using finance from FLA members. Of this, 45% is provided by the
finance subsidiaries of car manufacturers (known as "captives")
and the rest from independent providers (including banks and non-banks).
The majority of finance agreements are secured against the vehicle.
Asset-based lending allows greater flexibility to the customer
and is particularly helpful for consumers in current conditions.
3. FLA members provided £61.2 billion
of consumer finance in 2008. £18.8 billion (over 30%) of
this was for the purchase of cars via motor dealerships. The value
of new consumer car finance in the first quarter of 2009, compared
with the same period last year, was down 22% and the volume of
new business decreased by 27%. The value and volume of used car
finance in the first three months of 2009 fell by 16% and 8% respectively,
compared with the first quarter of 2008.
THE IMPACT
OF THE
CREDIT CRUNCH
4. These figures reflect to a significant
extent the impact of the credit crunch, which has made it very
difficult for many motor finance providers to obtain the funds
they need to pass on to their customers. Motor lenders were previously
able to raise liquidity via the securitised debt markets. These
markets have effectively closed. Where funding is available at
all, the cost is very high. This means that motor lenders are
increasingly unable to pass Bank of England rate reductions to
motor dealerships, who in turn are unable to pass them on to customers
in showrooms.
5. Furthermore, banks have reduced lending
to the motor market because of the perceived risk. This has adversely
affected motor lenders' ability both to provide funds to retail
consumers and to provide wholesale funding to motor dealerships.
In fact, the risks remain low. Despite market conditions, there
was only a small increase in retail motor finance arrears from
1.78% of balances on outstanding contracts at the end of 2007
to 2.06% at the end of 2008.
6. The consequence is growing unmet demand.
As more consumers turn to motor lenders for help because of the
reduced availability of credit elsewhere, motor lenders are being
forced to be more selective. Our most recent member survey shows
that approval rates at some motor finance providers fell by almost
20% in 2008, compared to the previous year. Early indications
are that some providers' approval rates will further deteriorate
this year. This has adversely impacted the ability of consumers
to get credit, and will continue to do so.
UNMET DEMAND
7. While credit generally continues to be
available to customers purchasing cars from dealerships (because
lenders are actively managing risk to maintain liquidity), the
situation is likely to deteriorate as 2009 progresses. A very
rough and ready estimate for 2009 is that FLA members may as a
result be unable to fund around £1.6 billion of customer
demand.
THE LIMITS
OF GOVERNMENT
SUPPORT SO
FAR
8. Government support for the lending markets
has so far been restricted to deposit-taking institutions including
the banks and building societies, and has excluded non-bank lenders.
As a result, the Credit Default Swap (CDS) rate (which measures
the cost of funds) has in recent months sometimes been twice as
high for non-bank motor lenders as for banks with access to Government
support.
9. The FLA welcomed the Government's announcement
of a vehicle scrappage scheme in the recent Budget. But if it
is successful in stimulating demand, it will simply add to the
growing gap between demand and the supply of finance described
above.
10. Similarly, while the European Investment
Bank (EIB) has announced an automotive support package, the available
loans are for the development of new energy-efficient technology.
They will not provide the short-term cash injection that is needed
immediately.
WHAT WE
HAVE PROPOSED
11. The FLA has therefore urged BERR, the
Bank of England and HM Treasury to extend their lending support
facilities to independent non-bank lenders and the lending subsidiaries
of manufacturers.
12. We have been discussing two main avenues
with the Government and the Bank. The first would involve a scheme
for the purchase of asset-backed securities (ABS) from motor lenders,
under the umbrella of the Bank of England's Asset Purchase Facility.
Despite initial enthusiasm from Ministers, the Bank seems concerned
about the consistency of such a scheme with its broader monetary
policy objectives, and talks have stalled. Nonetheless, a number
of FLA members have expressed interest in the commercial paper
and corporate bond schemes already available under the Asset Purchase
Facility. We hope these discussions may bear some fruit soon,
although they are likely to be of benefit only to a small number
of companies.
13. The second proposal would involve Government
guarantees (analogous to those already provided under the Credit
Guarantee Scheme) for ABS transactions in the commercial market,
originated by specialist motor lenders. Such guarantees would
help those companies who in the past used the securitised markets
to improve their short-term cash-flow and liquidity and so continue
to lend to consumers and businesses. BERR and Treasury support
the idea in principle. But discussions have now been going on
for many months, and it is urgent that we make progress soon.
CONCLUSION
14. The FLA welcomes the seriousness with
which the Government has approached discussions with the industry
on how best to help the motor lending markets. But these discussions
have now been going on since November 2008, with no end yet in
sight. The funding problems facing the sector remain serious,
particularly as lenders' existing funding arrangements expire
and they attempt to refinance. Action is needed now to avoid the
unmet demand described above, and the inevitable consequences
both for the motor industry and the local communities in which
it operates, as well as consumers and the UK economy.
May 2009
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