This month law firm Locke Lord publicised the arrival of its new head of UK asset finance, leasing and consumer finance, Joanne Davis.
Davis is well known in the UK leasing market, starting her career at the Royal Bank of Scotland as an in-house litigation manager for RBS subsidiary the RoyScot Trust; then taking a stint at BPE solicitors; after which Davis was selected to become the head of Shoosmiths asset finance and regulatory team for nearly four years.
Davis then moved across to UK legal firm DWF as partner for asset and consumer finance until a secondment to Volkswagen Financial Services (VWFS) as an interim head of legal in February last year.
"It was an interesting time and a great place to work", said Davis. "I was mostly focusing on the FCA project, getting all of VWFS’ application and businesses ready. You will have heard about all the changes in consumer credit, from the regulatory responsibility moving from the Office of Fair Trading to the Financial Conduct Authority, and the need for firms to move their interim permissions to full or limited permissions under the FCA.
"Effectively the task at VWFS was to lead the legal and compliance work stream of the regulatory project plan and work with the business to ensure that all of the requirements of the FCA were implemented, and to make sure that when VWFS applied for full permission to the FCA, that the application was fit and proper. It was a hugely successful project as VWFS had planned early enough and I was working with a team of experts across the business areas from sales and marketing to operations.
"It was a lot of work but we had a good project leader and a strong team to ensure we met the deadlines. It was a good team effort to implement the FCA requirements and I enjoyed working them, as they’re the largest motor captive, to support them through not only the FCA but also through a variety of new exciting initiatives to support their continued growth and success," says Davis.
"Before my departure, I also supported them in the appointment of a permanent head of legal and to give the legal and compliance team leadership and support, as I knew I wanted to go back to private practice as I missed working with my other clients. Yet I was sad to leave as it was such a great place to work."
In September the well-publicised emissions scandal struck VW, the parent company, although one might say that VWFS will be stronger having used Davis’ knowledge of the leasing market to select her successor.
"We have recruited a new head of legal for VW legal services UK," says Davis. "It’s good to have someone in that role for them permanently."
The VWFS posting was great experience for Davis, as part of her position at Locke Lord will be to work closely with businesses in the UK dealing with the challenge of regulatory change as well as the upcoming regulatory requirements from the FCA.
The Senior Management regime in the Consumer Credit market will be challenging for many businesses, for example; Davis said Locke Lord has been supporting banks, as their implementation date is much earlier, and Locke Lord is now preparing to support consumer credit businesses navigate these regulatory changes and build stronger board structures.
Davis’ recruitment to Locke Lord was triggered by the retirement of predecessor Steve Finch; Davis also brought some clients across from DWF, as well as two of Davis’ colleagues from DWF who moved to help support the new-look team.
"We had a supportive client base, and a couple of members of my team have come across from DWF with me. They joined 8 months ago, while I was doing my stint at Volkswagen, and will be based with me in London. I am enjoying working with business that I have worked with for many years again and developing he practice as we have had some exciting new clients join us, mainly from the challenge banks and financial institutions.
Davis admits that the changes will add up to a strategic change in the market share the law firm has in the UK.
"I have my UK client following, it’s nice to build on that, but it’s also nice to also work for clients of the firm, particularly the US banks that we are supporting, with their UK finance arms.
"Some of the banking and finance team that were already here are ex-Salans asset and consumer finance practice, so we already have a strong consumer finance and asset finance practice here that they have asked me to lead the Consumer & Asset Finance division for the UK.
"I’ve always been in a UK-centric business but to have the international reach of Locke Lord is a great resource. To be able to focus on the UK, but to have partners internationally to work with who are my counterparts and are heading different international offices is exciting and we can fully support our clients with our full service offering in both the UK and internationally."
Locke Lord’s market share strategy
Davis says Locke Lord, courtesy of the appointments, is in a strong position of growing its ‘one-stop shop’ offering.
"We work with asset finance clients, motor finance clients and consumer finance clients and its really a full service offering here, where we have all of the services that our clients need as a business with some exciting growth plans to strengthen our offering.
From here we can support the industry’s growth and development and look after those three core industries.
"We work for a lot of the motor captives; motor independents; as well as working for the asset finance captives and independents, and a lot of the work we do is supporting their business growth to make their businesses stronger.
"We also work on a lot of the US banking panels and we’ve got a presence in the UK to support them."
Certainly the changes have been heightened by the new focus and growth in the UK’s market focus on the SME, says Davis.
"We help existing businesses and new entrants with new set ups in the market, we support them through that process and make sure they have everything they need, which has been especially in demand over the last year or so from a wide range of different disciplines; bank-owned businesses, equity funding house-owned businesses, and independents.
"The market has changed as it has diversified; with a lot of entrants looking to access the SME market plus we have seen the growth in challenger banks/funders, the change in the broker market to include the consolidation and merging of brokers. I am really enjoying supporting our established business clients as well helping the newcomers to the market – it’s rewarding to be able to provide advice to a market that is well known to me but is new to then".
"The broker market has also reached out for us for support, and we support the NACFB as well as they are doing a really good job at supporting the broker community and so are the funders, which impresses me greatly as we need to support our broker market as well so that we do not lose our broker channel, which is important to the finance market place in the UK especially. We will no doubt see further regulatory impact our brokers if full fee disclosure hits the market and perhaps might result in more brokers doing their own book as well as lenders looking to review the structure of the broker arrangement to include more agency arrangements perhaps.
All of this comes with the need of legal advice."
Advising on the changing UK market
Advising on a rapidly changing and ’boutique’ environment that the UK leasing market is becoming is a challenge as the space left by the receding bank-backed asset finance is filled by alternative finance providers who don’t have the same legacy knowledge, but Davis finds a direct and holistic approach is the best strategy.
"I think there is a strong appetite for advice on asset finance. We are approached by businesses that want to have a leasing portfolio, or who are looking at having some form of asset finance or leasing product to add to their portfolio.
"Leasing often feels like a missing gap for the new businesses we advise. They want to know where they need to add insight to their business and this industry; or they want to understand the basic workings of the leasing market and how it’s used by customers; or even whether it is worth entering into this market, so we give advice based on that.
"We work alongside some of the senior advisers in the industry, whether that is accountants, consultants, legal, IT advisors, or investments specialists, and we will give all of that advice to the client business to help them. As our service to them goes, it’s a full business plan with strategic developments, and with the international cultures of Locke Lord it’s ideal."
Locke Lord, a US-based business, has its roots in US leasing culture, so Davis sees a strong advantage in how that can relate to business in the UK.
"I’m starting to learn a lot more about the US leasing market and want to learn a lot more, so I’m doing some international travel to understand how we operate across Locke Lord; what our consumer and leasing practices look like, with the difference in products and appetites for asset finance and leasing. There are differences in culture but a lot of complimentary aspects I think between the two."
2016: a year of consolidation in the UK market?
Already in 2016 the UK market has witnessed two acquisitions. Highbridge Principal Strategies acquired CIT Vendor Finance UK for an undisclosed amount, with the promise that it would buy more businesses. Star Capital Partners, which acquired Kennet Leasing, Ignition Credit and AH Financial for its Star Asset Financial platform, acquired Capital Finance Partners for an undisclosed amount.
Leasing Life understands there are more deals yet to be announced, which is backed by Davis’ opinion that 2016 will be a year of mergers and acquisitions for the leasing market.
"I think there’s going to be another year of acquisitions and new entrants, and I think there is going to be lots of consolidation in the small or medium ticket space, with new entrants that we will see."
Crucially this will include captives who are looking to provide their own financial services, says Davis.
Market heavyweight GE Capital is in the slow process of divesting its financial services and morphing into a captive: retaining its equipment financing unit for the UK, as well as captive funding for healthcare and heavy industry, amongst some other key verticals.
According to one source who spoke to Leasing Life, the Captives Forum is becoming inundated with new requests to join its ranks.
"I can see this including captives that don’t have a financial services arm and who are using independents, that would like to have their own financial services arm," says Davis.
"In the UK it’s such a specialist legal area, that there is so much to do to get them set up and ready in the UK, as well as getting them in touch with the right people, if that stretches across Europe or internationally."
But who else might develop a profile in the market and why?
"Now that we have more of an appetite for external investors coming into the market, coming from all different disciplines like private equity houses and sources of alternative funding, there are the independents that need advice.
"We have our challenger banks; not all of them have got an asset finance arm, so there’s appetite there.
"We have also got banks that used to have asset finance arms that are bringing that back, or banks that let go of their broker division that decided to bring broker divisions back. So there’s a lot of change!"
Davis thinks that the flow of external money into the market has created good opportunities for Locke Lord as new entrants seek to gather the working knowledge they need through legal advice.
"With the captives it’s very easy to be sure that you have all the right add-on products, because you do that within your own umbrella of services.
"I think the independents would like to also ensure that they’ve got not just offering leases but making sure they have good maintenance plans, service plans, and ensuring that the customer has got all the additional add-ons.
"Who might they need to work with to facilitate that? If you’re not a captive you don’t automatically have that there. It’s a big discussion if you’ve got leasing products, we need to have the right service products around that, and so we are doing a lot of work around building products and platforms, which we can evidence to the client to say those extras are of beneficial value."
What to look for in 2016
There are a number of business critical issues for UK leasing market participants coming over the horizon this year which Davis said she would be prioritising when approaching advice for clients.
"We have all the consultation papers on SMEs that have been released by the UK government. These concern the SME’s definition, and whether we want to be regulating businesses even more, which is a concern, as well as an opportunity.
"We have the lease accounting joint standard and what their final proposal looks like, and to consider how this affects the leasing business. We have a raft of new regulation including changes in data protection; and anti-money laundering regulation which is on its way. We will also see the leasing industry absorb the Financial Conduct Authority’s senior managers implementation regime, which some of the banks are going through now.
"And those businesses which are doing any consumer credit, which as you know includes independents that are SMEs themselves, will need advice. Some smaller lender businesses want the SME definition to be even wider so they can extend their business, against the view that even more businesses are going to be caught by the regulation. It’s a challenging time.
"I think it’s a worry for independent funders that the SME definition might become wider. It’s a concern that businesses might say that they don’t want to do any regulated business whatsoever, and as a result they will stick to un-regulated business.
"Smaller commercial finance providers could be pushed into regulated business because they have to do so to keep their customers happy."
The push and pull on the UK broker market
The UK broker market’s size and status has been challenged by the regulation brought in the by the FCA.
If a broker does any consumer finance in the UK, no matter how small a percentage of the total business or how small the business is, they will need to be fully authorised by the FCA. For the more senior one-man bands in the UK market, this might herald the early onset of a few succession plans as brokers retire.
"I think we will see the broker market shrink, in asset finance, and obviously that is a concern: we want more brokers, not less," says Davis.
The beginning of regulation is a good opportunity for UK funders with broker relationships to start a dialogue over quality standards as a commercial understanding between brokers and funders, says Davis. Funders can then be assured about the consistency of service between provider and end-user of the lease, she explains.
As Close Brothers Asset Finance chief executive Mike Randall revealed at the Leasing Life conference last December, Randall has been leading a group of funders setting a minimum set of standard for the broker/funder relationship. Randall has been working alongside Simon Goldie, head of asset finance at the UK’s trade body the Finance and Leasing Association (FLA), and Adam Tyler, chief executive officer at the UK’s National Association of Commercial Finance Brokers (NACFB), as well as a host of funders that include Lloyds, Shawbrook, Aldermore and Hitachi.
"I’ve been commissioned to work on the minimum set of standards for brokers; on monitoring and supervision, and helping the NACFB on the working group with a number of funders.
"The brokers are doing a lot of work on the implementation and we are concerned that if they have numerous funders all demanding different things for auditing and supervision requirements, it will get very confusing.
"So we are trying to develop a uniform market response see as an industry with the banks included working on a minimum set of regulatory and reports standards that funders will expect from their brokers."
"The clarity on what a good quality service looks like is important when you come to monitor and supervise your brokers, and brokers can be a risk to funders, but at the same time are very important integral parts of their business if you have a broker channel.
"A lot of the brokers are small businesses themselves, and we want to support them."
Appointed Representatives model
"I think at the moment banks and funders realise that to take on any brokers under the FCA’s Appointed Representative regime that it’s giving a big indemnity to the brokers, and it’s a big risk," says Davis. "But if you look at the insurance market or anybody that had to come under the FCA umbrella, eventually you do need to embrace it in some shape or form.
"There are two models – the introducer model, and the fully authorised model. The former carries less risk than the latter. Funders are looking for advice on that. I think we will see a shift change in attitudes from funders, because they want to support brokers, as they are a big part of the business, so we’ll see funders approaching this strategically, and looking at the risk." Self-employed brokers on an agency arrangement might be a growth area".
But whilst the FCA plays the role of headmaster, the UK leasing market needs to produce its own response to teach market participants what is the best course of action.
"It’s the educational function too," says Davis. "Once you’ve educated what the Appointed Representative scheme does and how it functions, in my view some of the areas of risk that funders see are not necessarily realistic."
Davis speaks highly of the UK broker market’s resilience so far in the face of ongoing change.
"I’m really impressed with the brokers that I’ve worked with, from the large to the small; I’ve seen them embrace the changes in regulation and appreciating that it’s integral to their business, to embrace it and to work with it, and to do what’s necessary to comply.
"There will be some that are ready to retire because of oncoming regulatory change, but generally I’m very positive about the brokers that have embraced it. We have given a lot of advice and they’ve been very good about putting in the right levels of compliance and structures.
"Some of the smaller brokers will probably join up, in mergers, to present a stronger more solid platform; with some of the larger brokers holding some of the smaller brokers as Appointed Representatives, or businesses setting up to hold brokers and some of the funders holding that as well.
"You can look at some of the self-employed broker models as well, through the agency regime under the FCA, which sometimes is something that seems to get missed.
"If you have exclusive brokers to you, you can set them up as self-employed agents. There are lots of different models and we’ve been giving a lot of advice on that."
It looks like that the UK’s legal advisors will be as busy as the market it provides for in 2016.