Appropriately for the season, stuck in the details of a generally anodyne FCA consultation paper on the fees by which firms cover the regulator’s costs, is an old chestnut: What is a lease? The answer could have a surprisingly big effect on FCA regulated firms’ costs.
In response to input from a range of firms, including ours, the FCA asks whether it’s right that offering regulated hire agreements leads to higher FCA fees than offering hire purchase agreements. The FCA is looking for views by 15th January on whether there’s a fairer way of distributing its costs amongst regulated firms.
Many in the industry refer to a lease as a hire agreement, a contract with no purchase option. To help understand the FCA consultation, however, it helps to use the wider accounting definition of a lease, that is any agreement that gives the ‘right of use’ of an asset to another person, regardless of what happens at the end of the contract period.
Under consumer credit law, lease agreements with purchase options when provided to individuals or unincorporated small businesses are classified as credit agreements. The level of FCA fees paid by regulated firms depends on the firm’s regulated income, and for credit agreements the regulated income is the interest income.
Lease agreements with no purchase options are classified as hire. For hire, the regulated income is the total rental charge (just excluding any extra services such as maintenance). As a result, FCA annual fees for a £20,000 lease might be £5 per year for a credit agreement, but £20 for hire.
The current arrangements seem unfair for firms providing hire agreements. Leases with no purchase option are often for longer periods and/or are extended, so the benefits to users are similar to those from leases with purchase options.
The FCA is seeking views on alternative ways of distributing their fees (and let’s be clear, if some firms are to be charged less others will pay more, but that’s across all FCA consumer credit firms, the majority of which are outside of the leasing industry).
We think there’s a simple way of redesigning the FCA fee structure that’s fairer for all lessors and their customers.
For any lease (again, using the accounting definition) the regulated income should be calculated in the same way, based only on the interest income.
The interest calculation is already done for credit agreements. It should be straightforward to apply the same accounting method to hire agreements, taking the advance less expected residual value, calculating the inherent interest rate, and then using this rate to calculate the annual interest revenue.
The FCA paper sets out a couple of other options, but we are concerned these won’t be as fair to all firms.
In our view, hire agreements with high interest rates, including sub-prime, should attract higher FCA fees than those with lower rates.
That doesn’t happen under those alternatives.
With the shift in the economy towards usage models away from ownership and changes to lease accounting, leases without purchase options could become more important for many lessors. Simplifying the FCA fees structure by having all leases treated the same way would not only be fairer today but would help support a stronger leasing industry in the future.
The FCA has made clear it needs to hear from the lessors now if it is to make the change.
We encourage firms to consider responding to the FCA consultation before the 15 January deadline.
A briefing note is available to help firms to respond without having to spend time studying the details of the FCA consultation over the festive season.
For the briefing note please contact Julian Rose (email@example.com)
* Jason Davies is general manager, One pm, Kerry Howells is managing director, Tower Leasing, Anne Williams is chief operating officer, Henry Howard, Tim Tainty is managing director, Kennet Leasing and Julian Rose is founder of Asset Finance Policy