How Labour’s victory may affect the asset finance industry

Labour’s landslide victory in the recent UK general election after more than a decade of Tory rule may lead many asset finance companies to wonder how the new regime will affect their business.

We’ve identified seven key areas where the passing of the baton may have implications for the asset finance industry. 

Economic stability

The first of Labour’s First Steps in its manifesto is to ‘deliver economic stability’. This is a clear reference to the chaos of the last-but-one administration and an attempt to portray Labour as the party that can be trusted with the economy. However, the new Chancellor, Rachel Reeves, is walking a tightrope: she’s ruled out major tax rises (increasing capital gains tax is a likely exception), and significant cuts to public services are not going to be politically palatable. That leaves economic growth as the only way out of an increasing debt burden, and that in turn means being business friendly.

The government’s autumn budget statement will be the ultimate indicator of their intentions, but asset finance companies should tentatively assume that they will be able to invest with confidence and that the government will be looking to facilitate economic growth, which has lagged since the COVID-19 pandemic.

Support for SMEs — and those who facilitate their growth

Part of facilitating growth of the real economy — and a particularly politically favorable part at that — will be supporting small to medium-sized enterprises, or SMEs. For example, Labour has indicated they may put more investment into the British Business Bank. Asset finance is one of the key channels through which financial support can be provided to SMEs, providing businesses a cost-effective means to acquire growth-critical equipment. One possibility is that we could see more government guarantees for SME finance, similar to those implemented in response to the pandemic. Relative to the rapidly-enacted response to the pandemic, however, we can expect the support to be more targeted and with stronger provisions to mitigate the risk of fraud.

Green energy initiatives

Labour is eager to implement green initiatives. They have committed to co-investment in green infrastructure such as wind farms and gigafactories, which produce batteries and other components of electric cars. To do that, the government will need investment from other sources, including asset finance companies, so this presents an opportunity for our industry. 

In particular, businesses are likely to focus on transition finance — not necessarily complete overhauls but incremental progress towards their net zero obligations — as well as progress on environmental, social, and governance (ESG) reporting, which will be required by growing regulations. 

The transition to battery electric vehicles (BEVs) is a critical part of the country’s net zero journey. However, the pace has slowed in recent months as the market struggles to cope with a dysfunctional secondary market for BEVs. If Labour is going to meet its environmental objectives, then it needs to step in to support the used EV car market.

Reform to the Consumer Credit Act (CCA)

The previous government considered reforming the CCA, which many have long argued isn’t fit for purpose for modern asset finance companies or their end customers. If the new government can find time in its busy agenda to push through the needed reform, then it should simplify compliance for companies while simultaneously offering consumer protection in a way that is better suited to the digital economy. The goal is to move from the current prescriptive approach to one more focussed on successful outcomes for all parties.

European collaboration

While the Labour government is less ideologically tied to Brexit than its Tory predecessors, it’s a wound that it will not want to reopen. Nevertheless, growing the economy necessitates closer relations with our nearest neighbours. So, expect the new government’s messaging to be about moving forwards rather than backwards — “reset” seems to be Prime Minister Keir Starmer’s preferred term. For UK-based companies, the reset hopefully entails a pragmatic alignment with European regulations in return for preferential access to one of the world’s largest markets. 

Capital allowances

The previous government initially introduced 130% ‘super allowances’, then the current level of 100% first-year allowances (FYA) to stimulate investment and growth by assisting companies with the cost of investments in plant and machinery. These allowances could not be claimed on the provision of certain leased plant and machinery. 

Before the election, the government of the time advised they would consider extending the rules to allow lessors to claim full expensing relief, who could then pass on a share of the full expensing benefits with lessees via their rental pricing. Post-election, the new government is continuing with these discussions in a consultation period with leasing industry bodies, who would welcome extension of the rules for the benefit of their members. 

But given the current tighter economic circumstances, relaxation of some tax rules and increases to the scope of benefits and allowances will come under scrutiny in order to balance the budget. The current government has to think carefully about its fiscal policy and decide where, and when, FYA restrictions can be lifted for the leasing industry.

Progressive regulation for new technologies

Innovation is the goose that lays the golden eggs, and the government will be keen to ensure that the UK continues to lead the world in fintech. Two opportunities stand out in Labour’s pre-election pamphlet Financing Growth: AI and extending Open Banking. 

We should expect progressive regulations to be implemented relating to the use of AI in financial services, providing confidence to finance providers that they can invest in AI tooling safe in the knowledge that the regulatory rug won’t be pulled out from underneath them. 

Open Banking is intended to provide a common language through which financial tools and apps can share data, encouraging a democratisation of the financial technology landscape. To date, this has focussed on core retail banking, but we can expect the scope to expand, with potential wide-ranging impacts such as new methods of payment like variable recurring payments and digital wallets, the growing importance of a rock-solid API strategy, and requirements for 24/7 availability of key services.

Warm signals for asset finance under Labour rule

Overall, the nascent Labour government appears to be bullish on investments in SME partnerships, ESG initiatives, and progressive regulatory changes, so asset finance companies would do well to integrate those concerns into their business development initiatives. Keir Starmer’s government seems to be shaping up to be more pro-Europe than its predecessor, with overtures being made to Germany and France in particular. Squeezed between manifesto commitments to avoid significant tax rises and spending cuts, the new administration has little choice but to focus its energies on firing up the British economy. It will be careful not to compromise consumer protections as it does so, however.

The upcoming autumn budget statement will clarify remaining ambiguities. But it’s never too early for finance companies to plan for political externalities.