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.
Key factors driving change in the industry
The combination of four factors – electric vehicles, mobility/car sharing, the connected car and the autonomous vehicle – will lead to the transformation of the motor industry, according to Mike Masterson, chief executive officer of ALD International.
“From 2025 onwards it’s anticipated the electric car will have a lower total cost of ownership on an unsubsidised basis than the conventional car and that will inevitably have a consequence for the development of electric vehicles,” he told delegates at the International Auto Finance Network (IAFN) conference.
“In terms of car sharing and mobility, we’ve seen rapid development of car sharing through peer to peer, corporate and private schemes, and this is likely to continue.”
Connectivity is growing and attracting the attention of many different players, including the big tech companies, and there is a “strong argument” for the extension of the connected car – the autonomous vehicle – according to Masterson.
However, he added that the timing is difficult to estimate as there are still legislative issues to overcome and many of the problems that existed in developing the electric car will exist in terms of the volume needed to make autonomous vehicles cost-effective.
Call for Government to be fairer on company car tax
Jay Parmar, director of policy and membership, urged the Government to take a fair approach to the tax treatment of company cars.
He highlighted a number of “ill-informed” tax changes, such as the benefit-in-kind rate for a pure electric vehicle, which falls from 16% to 2% in 2020/21.
“We don’t think the Government has thought about this logically because it will result in people putting off the decision to take ultra low emission vehicles, waiting for the lower tax band to emerge,” he told delegates at the BVRLA industry conference. “What we’ll be calling for is why not introduce this immediately? Why not start thinking about implementing that now? It’s a good example where the Government can show leadership, bringing those bands in earlier, rather waiting for 2021.”
The changes to VED in April are “another good example of ill-informed tax changes”, according to Parmar. “We understand VED needs to change, 75% or two-thirds of the vehicles that are being registered pay no tax so we know we have to have a grown-up conversation but the way they’ve implemented this has added layers of complexity,” he said. “It’s confusing, it’s moving away from what we regard as a very progressive VED system and it’s hitting the daily rental sector, particularly those members that are selling vehicles in the first year, pretty hard. Our view is we should defer this. If not defer, then phase it in.”
He also called for a “grown-up conversation” about lease accounting, saying the Government has an “opportunity to think about the unfairness of the system” and move away from capital allowances to commercial depreciation.
New legislation likely to be part of rolling programme
The Centre for Connected and Autonomous Vehicles (CCAV) is focusing on regulation, research and relationships to encourage the development and, ultimately, the deployment of autonomous vehicles in the UK, Lucy Yu, programme leader, told delegates at the International Auto Finance Network (IAFN) conference.
“One of the principles we’ve taken with connected, and in particular autonomous vehicles, is that it’s probably not going to be appropriate to try to develop one great big law upfront,” Yu said. “These technologies are still developing, we don’t know exactly what they are going to look like and it doesn’t make sense to try to set all of the legal framework upfront. In view of that we’re working on a rolling programme of regulatory reform.”
CCAV, which is part of the Department for Transport and the Department for Business, Energy and Industrial Strategy (BEIS), has audited the existing legal framework in the UK and believes it has “one of the most open regulatory environments in the world for testing autonomous vehicles”, according to Yu. For example, there are no restrictions on the locations for testing and no requirement for companies to put down surety bonds. This has encouraged car makers to test autonomous vehicles in the UK.
CCAV is also investing £250 million in research and development projects over the next few years, such as the trials in Bristol, Greenwich, Milton Keynes and Coventry, which will provide real world evidence to help inform future regulation.
“We are only a small unit at the moment but we’re working hard to get out and build relationships with all of the different organisations who have an interest in the area of connected and autonomous vehicles,” Yu said.
This includes working with local councils and academics, as well as car manufacturers and tech SMEs.
“There are lots of opportunities to rethink the way we design our cities – not just the way we run our traffic networks, the way we co-ordinate our cities as a whole so we are working closely with local councils,” she said. “We’re trying to build a rich environment of stakeholders that we can bring into our conversations as we try to work out where to prioritise the funding and also where we do need to regulate, and where regulations might get in the way and lead to more problems down the line.”