2021: views from across the industry

Supply issues in the new car market and very strong demand in the used car market have certainly made for interesting trading conditions during 2021.

That said, the FLA’s Q4 2021 industry outlook survey shows that 88% of motor finance providers expect to see new business growth over the next twelve months. An increasingly large percentage of this will most probably be generated by online channels – no longer the preserve of the tech savvy, but now familiar territory to us all after the pandemic catapulted digital adoption forward by about 10 years.

Not only is the sales channel evolving, but so too is the type of vehicle that customers will choose. The ban on the sale of new petrol and diesel cars comes into force in 2030, so we need to get more customers into electric vehicles each year between now and then if we are to achieve a smooth transition with no market shocks. That’s a big ask in a relatively short timeframe, which is why the FLA has been arguing that lender involvement must be built into the Government’s Net Zero plans and supported with a Green Finance Wholesale Guarantee so that customers can be offered green finance at rates comparable to non-green options.

This year has thrown extraordinary challenges at the automotive industry. While the sector hoped for recovery in 2021 following the immediate impact of the pandemic and national lockdowns, global manufacturing issues created enormous problems. The semiconductor shortage trickled down to car dealers and retailers across the UK, whose pricing models have been thrown into disarray thanks to a lack of available stock. The release in pent-up demand from consumers should have boosted sales and facilitated recovery across the sector, but instead it put immense pressure on the new car market, pushing many buyers to the used car market instead.

“In such a volatile environment, dealers have had to show incredible resilience, foresight, and initiative, adapting sales methods and stock on forecourts in order to meet waves of demand from consumers, who often haven’t been able to get the type of car that they wanted. In a new era of home working, there’s also been a big focus in accelerating digital offerings. Dealers, retailers, and finance providers alike have worked hard to rollout functionalities that enable buyers to not only shop around for their new car online, but be able to explore finance options and go all the way to checkout from the comfort of their own homes.

With this year’s roadblocks likely to remain well into 2022, uncertainty remains in the car industry. But if consumer demand remains strong, then we should see an industry that’s proved itself to be extremely buoyant get back on its feet.

The automotive industry has experienced much change since the start of the pandemic and this continued into 2021 with restrictions lifting and a surge in used car demand.

January saw Alphera implement a ‘one rate, one commission model’ in response to the Financial Conduct Authority’s (FCA) changes on commission disclosure and discretionary commission models. These changes were not the ‘cliff-edge’ that some expected them to be, and those who embraced them have remained profitable. In fact, customers have reacted positively to the increased transparency and fairness of the new model with the added reassurance that the rate they’ve been offered is the same for everyone visiting that dealer.

The next challenge or opportunity, depending on your point of view, was the sudden surge in used car demand, due to global disruptions to new vehicle production. With this came increases in the price of second-hand cars and a decrease in the number of cars available. The shortages have continued throughout the year and although I believe prices will start to normalise, I expect the demand for used cars will continue well into 2022.

Despite current market conditions requiring a great deal of attention, we mustn’t let the focus on F&I compliance standards and customer retention slip going into the new year. As we approach the one-year anniversary of the new FCA regulations coming into effect, it’s imperative that ‘treating customers fairly’ remains the motor finance industry’s top priority. 

A positive outcome from 2021, following a difficult 2020, was that many dealerships were able to increase their profitability. May that continue into 2022 and beyond!

2021 has been an interesting year for the leasing market, to say the least. Coming out of the pandemic, data from the FLA shows the value of personal leasing provided in the year to September grew 44% versus the same period in 2020. However, the semiconductor shortage has stifled global production and consumers have shifted their attention to in-stock models. With the shortage causing lead times to double, in-stock orders became the go-to, with enquiries in April 2021 up 280% compared to the same month in 2020, and 7.67% higher than factory orders overall.

Elsewhere in the market, the biggest uplift in demand was linked to electric vehicles. With COP26 raising the global recognition and demand for electrified vehicles, inclusive of battery electric vehicles (BEVS), plugin hybrids and hybrids, enquiries for electric vehicles beat expectations and rose by 66% in Q3 compared to Q2 2021.

But even that rate of growth was topped by BEVs. Thanks to a boost in infrastructure, a greater range of BEVs being released to market and more awareness of range capabilities, Leasing.com enquiry demand grew by an astounding 87%.

With 2022 set to be another bumper year for electric, we expect to see BEVs account for 30% of enquiries in the leasing market, eclipsing the predictions of the SMMT, which expects to see BEVs make up 13.3% of new car sales next year. This is thanks, in part, to the low barrier to access that leasing offers ensuring that the latest electric technology is affordable.

2021 has thankfully been a more positive year than 2020, but not without its own challenges. The COVID-19 pandemic continues, but with substantially less impact than in 2020 following the successful roll-out of various vaccines. It is hoped this progress is not halted by the discovery of the new Omicron strain. The sale of motor vehicles has picked up during 2021, but again has not been without difficulties, especially in the new car market, following supply chain shortages created by the pandemic, pent-up demand and fragility of just-in-time manufacturing.

We also saw the end of many of the temporary measures put in place to deal with the pandemic, ranging from the furlough scheme to the FCA’s various temporary measures including in relation to motor finance agreements. Despite the FCA’s measures coming to an end on 31 July 2021, it is likely that the FCA will be keen to see firms ensuring a continued judicious approach to payment deferrals, repossessions and forbearance given current circumstances. In addition, the FCA’s focus on vulnerability remains keen having issued their guidance on the fair treatment of vulnerable customers this year.

Claims management activity continues both by law firms and claims management companies. Topics of relevance include affordability and commission models. Firms should continue to engage with regulators over concerns regarding poor CMC conduct, whether that be around the generation of leads, the authority to act or raising complaints en masse with no due cause.

Wishing you all a great Christmas and 2022!

In March 2019 the FCA published its final findings on motor finance, concluding (amongst other things) that “the way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale”. This was followed by the introduction of new rules banning the use of discretionary commission models from 28 January 2021.

The FCA was careful not to say that past conduct was non-compliant and I don’t believe it was ever their intention to open the floodgates to a sea of new claims. Nevertheless, the vultures were soon circling, presumably looking for “the new PPI”. You will do well to find a motor finance business who is not dealing with pre-action correspondence alleging secret commissions, breach of fiduciary duties and/or CONC, and an unfair relationship under s140A of the CCA. Many are also now defending court proceedings of this nature.

While many of these claims have either been settled or withdrawn, a handful have gone to trial in various county courts, with mixed results. At least one of these decisions has now been appealed, but that will not necessarily be the end of the matter as further appeals may follow. It may therefore be a while before we have a binding decision from a senior court which gives final clarity on the issue.

While it may be some way off, the potentially devastating impact of a final, binding decision which goes against the industry should not be under-estimated. It may even dwarf PPI in terms of sheer volumes. As an optimist, I find it hard to believe that we will reach that point. Surely our courts will act to protect any lender who can demonstrate full compliance with the FCA rules in force at the relevant time? I hope I am not wrong!

Over the past two years the motor finance sector has been at the cutting edge of using new remarketing strategies to optimise used car sales back into their white label client’s franchised dealer network.

Aston Barclay’s quarterly Insights Report has shown that overall, fleet and finance vendors have had a very strong ‘used car’ year with prices rising by 40% across all categories as demand continues to exceed supply throughout 2021.

As equity in vehicles remains high, so too does the number of voluntary terminations. This however produces an unusual problem for dealerships to manage, with large deposits meaning consumers can move up into the next category of vehicles while continuing with a similar monthly payment.

The shift will come when new car supply resumes, and equity levels fall. Consumers will have to make a choice between paying more each month to retain the style of car they have become accustomed to or moving back down a category to keep payments the same.

Repossession levels meanwhile are still low due to increase regulatory guidance from the FCA. Time is being invested in understanding why the driver has fallen behind with their car payments and if it’s COVID-19 related then the consensus is to be more sympathetic to their cause.

An increasing proportion of used cars in the market are on live contracts and so we can expect to see an increase in the number of vehicles destined for auction over the next two or more years.

With more used cars coming terminating finance deals another year older due to contract extensions, or simply three months older due to the payment holidays consumers were offered in 2021, the average age of many used cars continues to rise.

During the pandemic, Tusker has seen an increase in take up of salary sacrifice cars across the board, from nurses in Nottingham to accountants in Aberdeen. This suggests companies are successfully getting their grey car fleet population into new cars which are safer and more reliable.

We’ve particularly seen a move to salary sacrifice in the public sector during the pandemic from the likes of community nurses who need to travel for their work but who do not necessarily have business use insurance cover. The average P11D value of cars being added to Tusker’s fleet has reduced accordingly from an average of £39,029 a year ago to £38,343 now.

The speed at which companies and drivers are embracing hybrid and electric cars via salary sacrifice is phenomenal. It’s great to see our order bank fall below 50g/km for the first time. It’s a very positive trend to see grey fleet drivers switch to a new electric vehicle or hybrid on salary sacrifice, providing extra peace of mind for companies that their grey fleet drivers are behind the wheel of a fully maintained and insured new electric car.