Finance Houses

By J. MERCANT Itois no doubt difficult for the man in the street to understand exactly what is meant by the term 'finance house,' for such companies range in size from the very small concern with a purely local sphere of operation, perhaps only in one town, to the great financial institutions, with branch offices all over the country and sub- sidiaries overseas, which provide specialised financial services of many kinds. Most of these large companies are now associated with one or other of the banks, some being wholly-owned subsidiaries and others having part of their equity capital held by a bank. In between these two extremes of the small local concern and the great national company there are many hundreds of finance houses or 'industrial banks' that pro- vide the finance to enable manufacturers and traders to extend credit terms to their customers.

Most of the large finance houses whose names are today familiar were formed after the First World War, largely to handle the business re- suiting from the ever-growing use of motor-cars.

Before this, in the middle of the nineteenth century, the wagon companies had come into being to finance the purchase of coal wagons for the railways; and since Tudor times re- tailers, in one way or another, have supplied instalment credit.

The wagon companies widened the scope of their activities to include general hire-purchase financing, but it was not until after the First World War that most of the specialist companies were established to finance the wide range of goods with which they are now concerned. They have grown up with, indeed They have greatly stimulated the growth and diversification of, in- dustrial production; for by making instalment credit widely available they have encouraged the demand for durable consumer goods and thus, in turn, methods of mass production.

The larger organisations belong to the Finance Houses Association, which came into being in 1945, the original members being Bowmaker Limited, The British Wagon Company Limited, Mercantile Credit Company Limited, Mutual Finance Limited, North Central Wagon and Finance Company Limited, and United Dominions Trust (Commercial) Ltd. Sub- sequently, the membership of the Association has grown steadily and some fifty companies, including subsidiaries, now belong to the FHA, whose primary objects are to promote honourMale practice in the conduct of hire-purchase finance and to maintain good relations between members and the general public. The Association also acts for members in discussions with the Government on matters affecting their field of operations, and with trade associations which are concerned with hire-purchase finance. A quarterly journal, Credit, is published which contains authoritative articles and information of interest.

The Industrial Bankers Association is another organisation of importance, whose members, al- though smaller in size than those belonging to the FHA, also subscribe to a strict code of con- duct in the operation of their business.

At present it is open to any finance company, however small, however lately established or under-capitalised, to advertise for deposits from the public. Much has been written about the dangers of this to the ill-informed person with funds to invest, and it is understood that the Government has under consideration measures intended to protect the public from succumbing to exaggeratedly attractive rates for deposits, with little in the way of strength to back them. In May of last year, Mr. J. Gibson Jarvie, Chair- man of United Dominions Trust, largest of all the finance houses, had this to say in a letter published in the Times: 'In my view, all adver- tisements for deposits should include material abstracts from the latest audited balance sheet of the advertiser and, in particular, the auditor should certify the extent of the advertiser's realisable assets so that attention is properly directed to anything intangible that is magnify- ing the apparent net worth of the proprietors' own stake in the business.'

Not all finance houses advertise for deposits from the public—a few of the largest companies have never done so, and indeed do not accept anything but sizeable sums, which usually come to them from 'institutional' depositors. So far as the individual is concerned, however, he would be well advised always to inquire whether a com- pany with which he is considering placing funds on deposit is a member of the Finance Houses Association or of the Industrial Bankers Asso- ciation. He would do well, also, to avoid com- panies that offer high and uneconomic rates of interest.

Instalment credit is, of course, also provided by retail stores and shops, wh6 are concerned, for the most part, with household goods, whereas the finance houses specialise in financing cars and commercial vehicles, plant, machinery and equipment of all kinds for industry, commerce and agriculture. The table alongside shows the volume of instalment credit business financed in recent years by, retailers and by finance houses.

It may not be inappropriate, in conclusion, to say a word or two about hire purchase, as in spite of all the many informative articles and features that have appeared in recent months many people still do not understand the nature of a hire-purchase transaction.

A hire-purchase agreement is a document peculiar to this country and to other countries which have followed its legal system. It is a contract whereby it is agreed that the hirer (that is, the customer) shall hire goods for a stated period at a specified rental payable by in- stalments, usually monthly, and that when he has paid all the instalments he may purchase the goods, usually for a nominal sum. The hirer is also given the option to terminate the hiring and return the goods at any time, if he so desires. In this event, he is normally required to pay an agreed sum by way of depreciation unless he has paid a specified (and usually substantial) part of the hiring cost.

In short, it is a contract of hire with the option to purchase which the hirer may exercise if he so decides, and the hirer does exercise this op- tion in almost every case.

During the currency of a hire-purchase trans- action, the owner—either the trader or finance house—has the legal title to the goods and can retake possession of them (with the aid of the Court in transactions falling within the scope of

Owed directly Owed directly Total to finance to retail

At ‘,,nd of: debt houses stores & sltops

• (In f million)

December, 1955 461 205 256 December, 1956 376 172 204 December, 1957 448 256 192 December, 1958 559 332 227 December, 1959 849 522 327 December, 1960 935 610 325

the Hire Purchase Acts) in the event of default by the customer.

The object of a hire-purchase contract is to give a trader or finance house security in the goods and thus enable him to give the required credit to his customer without undue risk. It follows, therefore, that the goods must have some security value.

The ideal goods for hire purchase are those which are of standard design, are readily mov- able and have a good second-hand market. This description applies to a vast range of products, including motor ' vehicles; caravans, domestic equipment of all types and many classes of plant and machinery.

Subject to government regulations which may from time to time be current, the terms of each transaction are a matter for negotiation between the manufacturer and/or the trader and his customer and must obviously depend upon the customer's particular needs and desires and the amount which he wishes to set aside each month to meet the hire-purchase instalments. In some cases the customer may make a down payment of as little as 20 per cent. of the cash price and spread the balance over any period up to three years and in some cases even longer.

The important thing for all concerned to re- member is that the transaction must be so arranged that the customer can conveniently meet the monthly commitment without difficulty, and that at any time during the course of the transaction the value of the goods in the open market should exceed the amount still owing on them.