It’s a question I’ve come up against several times in recent weeks, as a series of BBC radio broadcasts by investigative reporter Adrian Goldberg have asked whether the asset finance industry is tightly regulated enough to avoid posing a large-scale risk to banks and consumers.
The problem identified is that posed when lessors have continued to pursue payments from businesses that have found themselves on the sharp end of deals with rogue distributors.
It’s a very simple formula: vendor signs lessee up to lease on the condition that a future revenue stream from the vendor or an associate company will compensate for rentals. Lease is passed to a broker, then to a funder, which buys the paper. Vendor or associate company fails, leaving customer paying for lease with no compensatory revenue. Lessor must decide whether to write off or pursue the outstanding debt.
Definitely unfortunate – but where is the need for greater regulation of leasing companies? It seems that in the current media climate of distrust towards the banking sector, what has been overlooked is that the lessors involved in these situations are being left in uncomfortable positions by ‘rogue’ vendor action, just as their customers are.
If anything, these sorts of deals underline the need for lessors and brokers to evaluate counterparty risk in sales finance agreements. However, this is in their interest to do in any case, and has been a logical and demonstrable focus for all leasing businesses in the more risk-conscious years since the recession.
This in itself raises a relevant point in considering the ‘new’ crisis in leasing – all the controversies reported so far by the BBC revolve around deals signed before or early on in the 2009 recession.
I would argue that were it not for the sudden onset of such hard financial times, many of the supplier collapses that triggered customer distress may not even have taken place.
If the supplier controversies are part of a systemic failure in the leasing industry, then why have there been no new similar cases in three years?
Yet, at the start of the most recent programme broadcast by the BBC, Goldberg announced: “Britain’s banks could be looking at a new toxic debt issue. Some of them are exposed to millions of pounds of leasing deals gone wrong.”
The second point is fair – there is no denying that lessors have been exposed to bad debt and collection costs as a result of collapsed deals.
Bank of Scotland Equipment Finance, the lessor primarily involved in the Elumina Iberica deals most recently discussed by Goldberg, went on record as having written off £2m as a result of the equipment supplier’s collapse.
However, the asset finance industry as a whole – by Goldberg’s own admission – was an industry worth £19bn as of 2010.
At the risk of trivialising the considerable difficulty faced by those affected by these deals, I would hardly say the sector was facing an epidemic.
In conclusion: yes, leasing companies should continue striving to be aware of the risks involved when partnering with new vendors. Yes, it is undesirable for all concerned when a debt must be pursued on a deal affected by a vanished supplier.
But is this an issue affecting a significant proportion of the industry’s business, and is it one that looks set to re-emerge unless non-specific ‘regulation’ is piled onto the asset finance industry?
I sincerely doubt it. By those criteria, I would be happy to say for the record that this isn’t much of a story.