How can the industry capitalise, and what must it watch out for?
Personal Contract Hire (PCH) is “not a flash in the pan” and will continue to rise in popularity, said David Blackmore, commercial director at Fleet Alliance.
The leasing and fleet management business, which manages 18,500 vehicles, has seen PCH grow from 5% of its overall volume in 2015 to nearly 20% last year, with a mix of company car drivers opting out of traditional car schemes and retail customers choosing to lease rather than buy.
Last year, the car leasing market grew by around 10% with PCH accounting for 57% of that increase.
Last year’s FN50 survey found the average split of business to private sales (many of which will be PCH) was 87% business, 37% retail – equating to 156,252 cars classed as retail business.
Graeme Bannister, consulting director at Frost & Sullivan, said that PCH is “evolving” and is no longer the “tough sell” it was 10 years ago. He predicted that personal leasing will rise to 10% before 2020 and “has the potential to get a lot bigger” as awareness of the product grows.
He highlighted how marketing campaigns from both volume and premium car brands now focus on leasing.
Contract hire is still the dominant funding method among BVRLA members but, for the first time, the leasing broker sector reported PCH was its most popular funding method.
Different factors are driving the growth of PCH, according to Blackmore, with one of the main ones being “the availability of eye-wateringly cheap rentals in the market place”, combined with “changing buying habits”.
“Consumers are more comfortable with the concept of ‘use’ rather than ‘own’,” he said. “Lastly, and this can be a controversial point, with the rise in benefit-in-kind taxation we’re noticing a number of traditional company car drivers opting out of that and going into some form of personal leasing. From where we sit we’re not seeing that as being a massive factor but it definitely has a part to play.”
PCH is particularly appealing to company car drivers who have “enjoyed the comfort of full maintenance contracts” as they can opt for fully maintained contracts with PCH.
Blackmore suggested the forthcoming changes to salary sacrifice schemes have the potential to “drive people to look at other forms of vehicle funding”.
But the rate of growth of PCH will be impacted by “the challenges ahead” from “post Brexit pressures” to “potential interest rate changes” and “exchange rate pressures”, along with how keen manufacturers are to “move volume through the UK market”, according to Blackmore. “I think the future will be positive for personal contract hire,” he said. “It will continue to grow but, depending on pressures going forward, I’ll be interested to see how that looks.”
What does PCH mean for residual values?
Personal leasing is “unlikely to bring any nasty surprises” from a residual value (RV) perspective, according to Andrew Mee, senior forecasting editor, gold book at Cap HPI.
Typically the contracts will be for two or three years and they will be “absorbed into trade sales without any difficulty because the numbers are relatively low”, in his view.
“I think the PCH returns, when they do come, will be attractive to trade buyers because like PCP [Personal Contract Purchase] they’ll fill that gap
in the market where there are relatively few
vehicles,” he said.
To manage RV risk, leasing companies should apply the same principles to personal leasing that they would to traditional corporate leasing.
Mee said: “Make sure you’ve got a good mix of vehicles coming back, look out for brands of models that are prone to pre-registrations and to short-term rental activity, and consider whether or not you want to do non-maintained vehicles.”
The new PPI?
Could personal contract hire (PCH) become the next PPI (Payment Protection Insurance)?
That was one of the concerns raised by a delegate at the BVRLA industry conference.
Andrew Smith, managing director at Consumer Credit Advisory Services, which manages the BVRLA’s audit and governance programme for leasing broking members, acknowledged “we are living in a claims culture” and that claims management companies are aware PPI is coming to an end and are “looking for the next big thing”.
He believes that there are two main things within PCH that pose a significant risk: excess mileage with customers “not really understanding it”, and failure to inform customers about like-for-like maintenance deals.
He also highlighted various potential compliance issues: limited permission firms not having correct documentation or not having any documentation at all; failure to understand what financial promotions actually mean and that it covers any communication with a customer (including social media), which could potentially influence them to enter into a contract; misrepresenting the source of funding availability (for example, a broker suggesting it is has a direct funding source with a manufacturer’s finance arm when in reality it goes through the dealership); sub-broking, where a brokers passes business to another broker, who then passes it on to a funder and the customer is unware; failure to tell customers a traceable credit search will be carried out as part of their application for a PCH contract, which could potentially detriment them in future credit applications; GAP and general insurance rules not being followed or ignored; passing on referrals for GAP and general insurance without getting the correct permissions; and templated registers or documents not being used or updated.
What do drivers want?
Leasing providers need to be flexible, transparent and make the process easy for drivers, particularly the ‘Millennials’.
“The millennial segment doesn’t care about the fancy, professional stuff. They care about something that is easily understandable in their language and is flexible,” said Magdalena Wochnik, senior product leader at InMotion, a subsidiary of Jaguar Land Rover, which is investigating future mobility services.
InMotion has found that “consumers don’t want to be stuck in the same brand for three years”.
“They get bored because new cars come out constantly,” Wochnik told delegates at the BVRLA industry conference. “There are emotional aspects around ‘I just fancy a new car’.”
Equally, there may be practical reasons why drivers need to change their car before the end of a three-year contract. Wochnik suggested that 90% of consumers feel they are stuck in the wrong car after just a year-and-a half.
“No one can pre-plan their lives for three years,” she said.
Mike Masterson, CEO of ALD International, who was speaking at the International Auto Finance Network (IAFN) conference, acknowledged the need to offer flexibility. “One of the focus points will be pay-on-use,” he said.
ALD already has a product in Italy called Ricaricar, which works like a mobile phone contract. Although a customer commits to a 36-month contract they can buy a top-up card for additional mileage on a monthly basis.
“It gives the customer a very low entry point and it allows the customer to pay-on-use through the number of kilometres that he does,” Masterson said. “You can buy 500, 800 or 1,000 kilometres as the starting point.”
The future of personal leasing?
InMotion is developing three concepts:
The ‘Spotify’ of car ownership: a subscription model to which consumers sign up and end whenever they wish, rather than being tied into a three-year lease. “It comes with operational complexity but you have no idea how much demand there is for that sort of proposition,” Magdalena Wochnik said.
The £0 car: consumers own or lease a car but make money when they’re not using it by sharing with others. “Is it currently operationally do-able? No, as no financial contracts allow me to do so but what if we could create the Airbnb of car ownership which means I monetise my car? We know 96% of the time the car is parked so what if I utilise the time and make something better out of it?” Wochnik said.
Utilisation re-constructed: provide finance for a person, not an asset. “You don’t utilise one car with one person for three years, you utilise a vehicle with different people over three years,” Wochnik said.