Fleet News

Major changes ahead for the back room boys

AS 2005 approaches, fleets can expect to read about insurance and accounting issues as two separate legislative changes take effect.

On the insurance side there is the new Financial Services Authority (FSA) legislation which requires all companies selling insurance products, including GAP insurance, vehicle replacement insurance, early termination and warranties, to register with the industry body or risk not being able to sell the products or offer advice.

On the accounting side there are the impending changes to the International Accounting Standards which could result in contract hire fleets having to show vehicles as an asset on their balance sheet. Both changes will undoubtedly filter down to affect the way decision-makers manage their fleets. We take a look at how both amendments will influence fleet decisions.

FSA professional indemnity insurance

AS of January 14, 2005 companies selling insurance that are not registered with the FSA will not be permitted to sell or even offer advice on products.

This means that all firms involved in insurance-based products are affected including retailers, repairers, carmakers and also fleet suppliers such as leasing companies.

Products such as GAP insurance, vehicle replacement insurance, early termination insurance, vehicle warranties and similar motor insurance products will come under the new rule.

The FSA has introduced the new legislation as it wants to raise standards of professionalism in a market that traditionally suffers from a poor image with consumers.

However, if fleets remain assertive and ensure that when purchasing vehicles or insurance-related products, the providers or manufacturers are FSA regulated, then it could be good news.

Harry Croydon, chief executive officer at insurance product and service provider Safeonline, explained: ‘The introduction of the new legislation should ensure more professional advice is given.

‘Sales people will have to be fully trained and if the company is not FSA regulated then the provider should not be offering the product.

‘This will mean that there will be better products. Over time there will also be an increase in service and professionalism.’

One of the main consequences of the legislation may be that some firms, including leasing companies, will withdraw from selling insurance-related products according to Croydon.

Retailers have three options – become fully authorised to sell and advise on all insurance-based products, become an ‘appointed representative’ (AR) for one or more providers to sell only the products they supply, or become an ‘introducer’ and have a passive display of leaflets promoting insurance-based products.

It is likely that leasing companies wanting to continue to sell insurance products, likely to be GAP and early termination insurance, will follow the AR route.

It takes about three months for a retailer to become FSA regulated and Croydon advises fleets which may be thinking about changing vendors to do it now, or demand proof that their current supplier will comply with the new rules.

International accounting standards

EMPLOYERS may have to rethink their fleet policies under international accounting proposals that would oblige companies to record contract-hired vehicles on their own balance sheets.

Changes to the standards have been looming for a while but although new measures will be introduced in January, fleets still have a few years before contract-hired vehicles may have to be recorded. Whether it will happen at all is still open to question.

Chris Burlton, senior financial accounts manager at Interleasing explained: ‘The only change from next year is that most European listed companies will have to use International Financial Reporting Standards, including IAS17 Accounting for Leases.

‘At that time, operating leases will still remain off balance sheet for both listed and non-listed companies. There is a planned refinement to the leasing standard that could move assets obtained under an operating lease on to the balance sheet.

‘This is not expected to take place until 2007 at the earliest and what is likely is that this will then be followed by similar changes in the UK .’

The International Accounting Standards Board (IASB) may eventually recommend that any asset whether leased or purchased, worth more than a certain value and used by a business for longer than a specified period should be registered on a company’s balance sheet.

Alison Chapman, tax partner at Deloitte, believes fleets are still a long way off recording contract-hired vehicles on their own balance sheets.

She said: ‘This research project is still in its very early stages and developments could still be years off.’

Businesses have traditionally been attracted to contract hire because it allows them to remove vehicles from balance sheets, appearing instead on the balance sheet of the leasing company.

Burlton added: ‘Being off balance sheet is just one of the benefits that contract hire has and for many businesses it will continue to be the best solution. Fleets need to consider their motivations for fleet funding.

‘Is being off balance sheet their key reason for choosing contract hire or do they get other benefits? They should also be talking to their leasing company about what funding solution best meets their needs, it may be that contract hire is still the best choice for them.’

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