The Long War Drags On
By J. W HUNTRODS RITAIN's finance houses are fiercely competi- tive and intensely individualistic, and this redounds greatly to the benefit of the growing numbers who utilise hire purchase or other forms of instalment buying. Rut their very vitality and adaptability,which have enabled them to increase their influence, often in face of artificially con- trived restraints, have also made them something of problem children for those whose job it is to try to keep the economy on an even keel. For as the evidence gathered by the Radcliffe Com- mittee emphasised, the finance houses are the most important source of credit outside the clearing banks, and their relative importance is likely to increase.
During the last credit squeeze, which began early in .1955 and reached its highest pitch of intensity in 1957, there were murmurs from Lombard Street that the finance houses were being successful in evading pressure on their liquidity by competing with the banks for deposits. Bankers complained that while they were subject to directives, finance houses were exempt, and that they were edging their way into business which should and could have been done by the banks themselves. There was some sub- stance in the charge—though the complainants tended to forget that however much money the finance houses could obtain, their opportunities for using it were severely limited by controls on hire purchase imposed through the Board of Trade.
In any event, the banks clearly did a lot oi quiet thinking. Recognising the growing import' ance of hire purchase, they determined to share in it. Two courses were open to them: either they could enter hire purchase direct, or they could enter into alliance with established finance houses. The first course was probably ruled out by lack of know-how, and the difficulty of train' ing or luring away experienced hire-purchase men in sufficient numbers. Probably they Were also deterred by recognition that the strength Of hire purchase lies in its easy availability at the point of sale. We are still a long way from con. ditions in which the average hire-purchase buyer would choose to go into a branch bank W arrange his hire purchase, before going along to a trader to choose, say, a motor-car. At any rate, whether for these or other reasons, the banks chose to ally themselves with existing institutions rather than to start from scratch. As soon as the squeeze ended in the summer of 1958 the banks, led by Barclays, took over or bought large shares in many of the best of the leading houses.
All this may now seem ancient history, but it is fundamental to an understanding of what has happened since, and what May happen in the next few years. The banks' action did not only increase the capital of their new allies, it also increased their standing as borrowers of short- term funds, thus effectively placing at their immediate command resources several times larger than the amounts of capital actually sub- scribed.
It is not surprising that, coinciding as it did with the end of a long credit squeeze, this easy availability of money immediately resulted in a race to secure the largest possible share of an expanding market. Moreover, the removal of terms control over hire purchase, which occurred shortly afterwards, allowed freedom to compete for business by granting credit on terms which often came near to being unsound. It is now fashionable to say that this rat-race was led by smaller companies—often, with reason, referred to as pirates. The truth is less simple, and less satisfying to the self-esteem of the finance houses as a group. An attempt by the members of the Finance Hous6 Association to agree on sensible credit terms failed miserably after a trial of approximately three weeks, and down pay- ments of 10 per cent. with repayments spread over periods of four years became too common for the good of the industry as a whole. Un- welcome though it be, we must face the fact that the reputable houses, as well as the pirates, fought for business on terms which experienced hire-purchase men sometimes knew to be un- sound. Cut-throat competition also manifested itself in other ways. In endeavouring to secure the highest quality business, leading companies often quoted rates which could only be margin- ally profitable, and at which one bad debt could swallow the profits on a whole series of satisfac- tory transactions.
In all likelihood, it is a pity that complete freedom did not last longer. After the beginning of 1960, •there were signs that the larger and more reputable houses were exercising greater discrimination in their business. After all, there are many cases in which very easy credit is justified, just as there are more in which it is not. Had freedom continued for another year or so, over-enthusiastic companies would have reaped the inevitable harvest of their rashness. As things are, the reimposition of controls has given an undeserved breathing-space to some companies suffering the effects of their own folly, while the established finance house is prevented from bene- fiting by its hard-won expertise.
But although some companies unable to with- stand the rigours of unrestricted competition may be helped for a while, there can be no doubt that we have entered a period in which the num- ber of substantial independent finance houses will steadily decline. Many local enterprises enjoying special' advantages or tied connections ,will last for a long time to come. The ability to survive and continue operations on any consider- able scale will, however, be limited to those companies enjoying institutional backing, and thus able to attract sufficient money at rates enabling them to compete successfully with those houses enjoying banking affiliations. Quite a number of such companies do exist and will con- tinue to prosper. Nevertheless, take-overs and amalgamations may be expected to continue at a rapid rate, and will probably be welcomed by the hard-pressed authorities who are burdened with the task of trying to control the financial system.
In the immediate future, the finance houses must face the difficulties raised by a new credit squeeze. Two successive rises in Bank rate have considerably increased the cost of financing their existing portfolios, on which the contractual charges (often very low) cannot be increased. And while hire-purchase charges have recently been raised to more realistic levels, new business is being markedly curtailed by the reimposition of terms control. To some extent this is being offset by a growth in pure rental business, which constitutes a perfectly legal by-passing of the new controls. But the greater success this rental business enjoys, the more likely the authorities are to introduce counter-measures. And in any case, rental .business has certain snags which make it a far from welcome development to some of the leading houses, who are forced -un- willingly into this field by pure pressure of com- petition.
The longer-term future of the established finance house remains bright, perhaps—ironi- cally enough—because the banks have chosen to support existing houses rather than compete directly with them. Although consolidation will reduce their numbers, and competition remain fierce, the finance houses will continue to consti- tute a highly specialised and important sector of the financial mechanism.