Brexit may be a reality, but the battle for financial services has just begun. Alejandro Gonzalez spoke to Stephen Haddrill, the director-general of the Finance & Leasing Association, to find out how EU-UK regulatory divergence could help the case for reform of the UK’s Consumer Credit Act (1974).
Following a much-heralded Christmas Eve trade deal between the European Union (EU) and the UK, the two frenemies returned to the negotiating table in January to discuss what cooperation, or lack of it, in financial services may look like.
The UK seeks equivalence recognition from the EU for the City of London, first in a memorandum of understanding (MoU) due by the end of March, and then with a more comprehensive deal, but not at any cost.
While the EU–UK Trade and Cooperation Agreement (TCA) signed in the last days of 2020 was widely reported as a success on both sides of the English Channel, the greater beneficiary from that deal, it could be argued, is the EU, which managed to bake-in its trade surplus in goods with the UK.
So, it was surprising, when an agreement with the UK’s single biggest export market for financial services – in which the UK has a surplus – was not also reached.
Instead, the EU and the UK agreed to kick the can down the road one last time.
Since 1 January, when UK financial service providers lost access to the EU’s single market and their European “passport” – which allows UK finance firms to operate in the EU under their UK licences – the decision on accessing each other’s markets has been left to each side declaring unilaterally that the other side’s regulatory systems are “equivalent” to its own.
If the two sides are to rekindle their pre-Brexit arrangements on financial services, they will need to grant each other regulatory equivalence on about 40 different business areas.
As of mid-February, the British government had granted the EU equivalence on 17 of these areas, while Brussels has committed to as few as two.
The UK seeks full equivalence across all areas, but the EU, fearful that the UK wants to remove European red tape from the UK’s financial services rulebook, has withheld its decisions on equivalence on the grounds that it wants to see how far the UK will diverge from its own rules.
In his annual Mansion House speech to the City of London on 10 February, Andrew Bailey the governor of the Bank of England, told a virtual audience: “The EU has argued it must better understand how the UK intends to amend or alter the rules going forwards.
“This is a standard that the EU holds no other country to and would, I suspect, not agree to be held to itself. It is hard to see beyond one of two ways of interpreting this statement, neither of which stands up to much scrutiny. “I’m afraid a world in which the EU dictates and determines which rules and standards we have in the UK isn’t going to work.”
A spokesman for Boris Johnson told the BBC on 11 February: “Despite the fact that we’ve supplied all of the necessary paperwork and are one of the world’s most preeminent financial centres, with a strong regulatory system, the EU still haven’t granted us full equivalence.”
No wonder the MoU talks have got off to a bumpy start.
I asked Stephen Haddrill, the director-general of the Finance & Leasing Association, what the FLA rank and file made of the rocky start: “This is of concern, but you have to remember the membership doesn’t do an awful lot of business outside of the UK.”
On the question of equivalence, Haddrill strikes a confident tone: “We were equivalent on the day before we left the EU so, of course, we are equivalent now and we need the EU to approve that quickly and, surely, they can do so.
“The EU recognises countries all over the world as equivalent and these nations don’t have exactly the same rule books as the EU. In recognising these countries what the EU is saying is that ‘the effect of these rules’, in these countries, is equivalent.
“The EU needs to recognise that the UK won’t be writing exactly the same rules or using the same terminology as the EU does, but these rules will be ‘equivalent in effect’,” says Haddrill.
Divergence & the CCA
One set of rules the FLA will be seeking to diverge from EU regulations on, is the Consumer Credit Act, 1974 (CCA), “which affects all parts of the FLA, including the asset finance part,” says Haddrill.
This “out-of-date” regulatory framework, which governs consumer credit for over 40,000 UK firms is “complex and ill-suited to the way in which … SMEs lease equipment to grow their businesses,” according to the FLA, which has been campaigning for changes to the Act for at least six years.
The opportunity to reform the CCA “without having to do what the EU Consumer Credit Directive (CCD) instructs, is helpful,” and will be a key part of the FLA’s reform agenda with the Conservative government.
The FLA criticises the CCA for being “unsympathetic in granting forbearance measures”, “heavy-handed in its approach to non-payees”, “inflexible” in responding to changing consumer demands and “disproportionate in its sanctions”.
The “economic jolt caused by Covid-19 has shed light on its inadequacies,” underscoring the need for root and branch reform, according to an FLA briefing on the CCA.
Last April, when the FCA, promised millions of UK small business owners loan repayment holidays to help ease the financial pressure from Covid-19, the strict wording of the CCA meant that credit providers were legally obligated to send threatening letters to borrowers telling them to repay their debts. The Act risked creating mass confusion among borrowers who simply sought to take advantage of the government offer.
“The arrears notices that members are expected to issue their clients are defined in law, and the language is somewhat aggressive in places when customers are looking for sympathy and not aggression.
“We want to modernise the archaic language that members have to use to communicate with customers, and members want to have the capacity to innovate more easily than the Act currently allows,” says Haddrill.
Much of the CCA’s antiquated language is tolerated by the motor finance sector.
A prime example of the CCA’s failure to adapt to modern times is the challenge it poses to the wider funding of low emission vehicles (LEVs), says Haddrill. Because the CCA adopts the Hire Purchase Act (1964) definition of a motor car as being “mechanically propelled”, this raises questions about the legality of existing hire purchase agreements for hybrid and electric vehicles (EVs).
Another confusion arises in relation to the funding arrangements for standard internal combustion engine (ICE) vehicles and hybrid vehicles (which allow for the funding of the entire vehicle in one contract) versus the funding of EVs (which allow for the funding of the battery and the rest of the vehicle separately using two discrete agreements).
“Now that’s a complete waste of time,” says Haddrill.
An FLA briefing on the CCA adds: “both methods lead to risks or complexities for the customer, finance company or both depending on the product used. “It would be beneficial for the CCA to allow for more than one asset to be financed against one agreement in one transaction … More flexibility could also allow for new financial innovations that make EVs more affordable,” the briefing says.
Besides dragging the CCA’s language into the 21st century, the entire consumer credit regime needs be brought under the purview of the City regulator, the FCA, says Haddrill, who himself spent nine years as the head of the former audit regulator, the Financial Reporting Council, before joining the FLA.
“What is needed is consolidation of the necessary parts of the Act and regulations into one body, into the FCA rather dealing with a Treasury process and an FCA rulebook, that would be a huge step forward,” he says.
FCA regulation is preferable to statutory legislation. Christopher Woolard’s recent FCA review of the Buy Now Pay Later (BNPL) market is a case in point, says Haddrill.
As Woolard found, online shopping in the BNPL unsecured credit market mushroomed in no time during 2020, with spending tripling to £2.7bn during the Covid-19 lockdowns, leaving behind a wake of indebtedness and a government on the back foot. In fact, one of Woolard’s recommendations was to urgently include BNPL products within the regulatory scope of FCA regulation.
“A statutory basis to regulation takes time to change, yet markets can shift quickly, which is why the FLA wants to get out of primary legislation and move to a more flexible regulatory approach,” says Haddrill.
Haddrill on VAT & Northern Ireland
Stephen Haddrill says that “Although the FLA membership doesn’t do an awful lot of business outside of the UK, there are real issues of concern, mainly about friction on the Irish border and the payment of VAT on goods as they cross borders.”
On 1 January, when the UK was deemed a ‘third country’ by the EU, VAT became payable on second-hand goods at the point of sale.
But Haddrill says concerns remain about the efficiency of this system. “You can recover VAT, in many circumstances, at the point when it’s due, but a question mark remains about how quickly, or easily, it will be recovered in future. Will it work as smoothly as before we left the EU?
“We see these issues as serious but largely transitional, it’s a matter of the parties getting together to iron things out.”
However, more problematic is the trade in goods between the EU and Northern Ireland (NI), which continues to be governed by the NI Protocol to the Withdrawal Agreement.
In Northern Ireland, which sources a huge proportion of its second-hand vehicles from Mainland Britain, used car dealers are concerned that they will pay a high price for making the Protocol work.
Due to the post-Brexit VAT changes, the Republic of Ireland has experienced a rise in the cost of importing second-hand cars directly from mainland UK, with the VAT expected to add more than €4,000 to the price of a car valued at €20,000.
Meanwhile, under the NI protocol, Northern Ireland continues to be treated as being within the EU Customs Territory and so vehicles imported to the Republic from NI do not have to pay the additional VAT.
Concerns were raised early in the process that Northern Ireland could become a ‘back door’ for used vehicles from mainland UK transitioning through NI, but these fears have been largely overcome as vehicles imported into NI from the UK mainland will also attract a VAT charge as NI is to remain within the EU customs territory.
But, given that the new tax arrangements are generally more complex in Northern Ireland, the price of doing business for used car dealers is expected to rise disproportionately in NI, which would undermine the UK government’s stated commitment to minimise disruption for NI businesses.
To address the disruption, HMRC recently introduced a scheme that allows VAT-registered dealers in Northern Ireland to claim VAT relief on purchases of vehicles from VAT-registered corporations, such as car hire companies and fleet owners.
It’s early days in the life of the NI Protocol and that makes used car asset finance providers in the Republic and in NI nervous about the unpredictability of doing business in the months and years ahead, particularly as the politics of rivalry and recrimination between the EU and UK appear to be on the rise.
Haddrill on the outlook for 2021
It’s been an “extraordinary difficult year” says Stephen Haddrill, about 2020, he himself only took charge of the FLA in December 2019, just as coronavirus was beginning its deadly assault on the other side of the world.
“The market was looking quite a bit stronger before Christmas. The extra lockdown has not helped, but at the same time I’m confident we will see a bounce back during 2021, not least because many businesses have put spending on hold.”
All things being equal, he is confident better times await: “The picture for 2021 should be much better than we’ve seen for 2020.”
“A considerable minority of the population is heavily indebted and is struggling, about half of the population is no worse off, and a third are feeling better off. Those who are no worse off and better off represent pent up demand that should come through after Q1 and H1” he says.