SUBMISSION OF HONDA CANADA INC. AND HONDA CANADA FINANCE INC.
TO THE DEPARTMENT OF FINANCE REGARDING VEHICLE LEASING
As you will know, Honda Canada Finance Inc. and Honda Canada Inc. operate 13 facilities and
service 228 Honda and 48 Acura dealers coast-to-coast in Canada. Honda directly employs more
than 5,000 manufacturing and sales Associates and indirectly employs more than 16,000
Canadians through our national dealership networks. Our success is built on planning for the
long term and on our successful investments in the Canadian automotive market.
Our business model rests on being attentive to the consumer and responsive to the many
hundreds of small business owners who operate Honda and Acura dealerships in towns and cities
across the country. For more than 20 years, we have ensured that our consumers have a choice
between leasing and buying their Honda or Acura vehicle. Responding to consumers and
keeping an eye on the long term success of both the auto industry and our company is part of
what our leasing arm, Honda Finance, does.
DIAGNOSING THE REAL CHALLENGE
While we recognize that parts of the vehicle leasing market are facing significant short-term
challenges in making lease financing available to car and truck buyers, the key to an effective
solution rests on accurately understanding the problem and then devising a solution that responds
to the specific problem in a principled manner.
First, we believe that the problem has two components, neither of which requires a fundamental
change to the made-in-Canada model of lease financing which has worked very well for small
businesses and consumers in the automotive marketplace. The first challenge is the tightening of
liquidity in the broader financial markets. The Government has already taken significant steps to
address this concern and there are already signs that the credit crunch is easing and access to
capital and financing is improving. Allowing banks which are federally regulated institutions
into this market segment will not have any effect on this broader problem.
Secondly, only certain parts of the vehicle leasing market are having difficulty. That is not a
sign that the system is not working nor does it signify the need for wholesale reform. Instead,
the Government should act as it has already done by providing assistance to those few troubled
players. In this regard, we applaud the Government’s efforts to expand access to credit through
the Canadian Secured Credit Facility and we believe that, properly structured, this programme
can provide the assistance that a few companies need to help their customers.
As we understand this is the scope of the problem, it is clear that the solution does not require
any broad changes to the current vehicle lease financing system that has worked so well for
consumers. In fact, we believe that any solution that allows banks and others into the vehicle
lease market will have a detrimental effect, over time, on the consumer cost and availability of
lease financing, on the financial health of dealers and on the broader automotive industry in
A PRINCIPLED APPROACH
Instead, we believe that any solution must address the following core principles:
Protecting the consumer.
Protecting small business.
Preserving auto industry jobs.
Ensuring access to lease financing.
In our view, allowing the banks into the vehicle leasing market will be counterproductive to a
model that works best for consumers and has lived up to these four core principles.
PRINCIPAL ARGUMENTS IN SUPPORT OF MAINTAINING A MADE-IN-CANADA
MODEL THAT WORKS BEST FOR THE CONSUMER
1. The manufacturer supported finance companies provide better value to the consumer.
Approximately 40 % of the leases provided to customers of Honda include a subsidy by the
manufacturer in the financing rate for sales of new cars and trucks. This subsidy provides real
value to the consumer and enhances the affordability of our products. In other words, Honda
views its leasing business in light of the long term success of its automotive manufacturing and
sales efforts and the success of its network of dealers. This broader perspective on the health of
the automotive industry provides an incentive to competitively-priced leased financing. Banks
have no built-in incentive to consider this broader perspective.
There is no evidence that permitting banks to provide vehicle lease financing will reduce the cost
to consumers. For example, the US experience shows that bank competition has not improved
customer satisfaction, access to financing or overall affordability.
2. Manufacturer supported finance companies are more attentive to the long term health of
the sector, including future car sales and continuing employment.
A high residual value is an important attribute of a car for the consumer but it also ensures that
the market for new and quality used cars is balanced. Honda Finance seeks to ensure that the
overall market for new and used Honda and Acura vehicles is balanced, competitive and
thriving. This ensures that we remain healthy as a Canada-based manufacturer and helps
maintain jobs. Again, banks will have no built-in incentive to weigh the long term viability of
the automotive industry as this is not the primary focus of their business.
At the front end of the leasing transaction, any institution that is not in the automotive business
and which seeks to provide leasing support to customers may face an incentive to over-inflate
residual values to minimize the size of monthly lease payments. As there is no insurance
currently available in the market to protect against residual value risk, these institutions will
likely be forced into the used car market. The lack of experience of these institutions in the
automotive market may force them to bring quick closure to their lease exposure by selling used
vehicle portfolios into the market at below market prices. This could have the effect of
cannibalizing sales of new cars, detrimentally affecting the long term health of the industry and
the jobs it supports, as well as hurting the existing network of dealers who sell the used cars they
have taken back from their lease customers.
3. Dealer viability should be enhanced, not put at risk.
Our Honda and Acura dealers build their business in communities all across Canada on the basis
of attracting new purchasers to a quality product and on keeping the clients they have. Retaining
the customers who are returning vehicles after the expiry of an existing lease is an important
mutually beneficial customer relationship tool for our dealers. If customers deal primarily
through the banks, the dealer to customer connection can be lost, hurting the economic viability
of dealerships and depriving the customer of possible loyalty incentives.
4. Banks should not participate in commercial enterprises
A principle of the Bank Act is that banks should be lenders and not operators of commercial
enterprises. If banks engage in vehicle leasing, banks will also be entering into the business of
wholesaling off-lease vehicles as part of managing their residual value exposure. We believe
that bank involvement in parts of the car business, particularly the sale of used cars, will not
benefit the customer, car business or the banks.
Further, the potential role that the banks would have in the automotive marketplace raises
concerns among our dealers with the potential conflict of interest. On this point, we echo the
1997 report of the Canadian Automotive Dealers Association entitled “The Vehicle Leasing
Business: Protecting the Consumer and Small Business” which cautioned that allowing banks
into the vehicle leasing business, who as lenders to dealers have access to their retail lease
customers and financial records and would also be competitors both for the lease customers and
on the sale of used cars, could create an “out-and-out conflict of interest”.
5. Protecting Consumers
Honda Finance and other manufacture supported finance companies follow strict disclosure
requirements for lease financing contracts and are required to abide by provincial consumer
protection legislation. In order to ensure that consumers are not deprived of the protection
afforded by the cost of credit disclosure requirements under provincial consumer protection
legislation, the Bank Act, or its regulations, would need to be amended to incorporate
harmonized requirements for a Bank sponsored vehicle lease.
Finally, our dealers will often provide a break to a customer returning an existing leased vehicle
with minor wear and tear damage in order to retain customer loyalty. Banks are not likely to
have any such incentive. In fact, given that the Banks mandate is to maximize their return and
minimize its costs at lease termination, customers will likely find that they are required to pay a
larger sum at lease termination than is the current experience.
FINDING THE RIGHT SOLUTION
We believe that the challenges that part of the market faces in vehicle lease financing are short
term ones, requiring only a short term solution. Any significant and long term change, such as
allowing banks into automotive leasing, will require a long period of ramping up, by which time
we expect the problem will be resolved.
For example, we believe that any proposal to extend vehicle leasing to banks requires an
amendment to the Bank Act – and any such amendment will not be done quickly.
As the restriction relating to the leasing of motor vehicles is expressly provided for in sections
417 and 464(1) of the Bank Act, an amendment to the Bank Act will be required to permit banks
to enter into lease agreements for motor vehicles having a gross vehicle weight of less than 21
In addition, any new entry into the market will require considerable time to launch a product that
purports to meet consumer needs and that includes the needed infrastructure outside of existing
dealership networks and the OEMs to provide the front end leasing and the required
infrastructure to manage the wholesaling of off-lease vehicles.
In other words, we do not believe it is realistic to expect any new players in the market for quite
some time, by which point we expect the issues that some market participants are facing will
likely have been resolved.
We appreciate the opportunity to provide input to the Department of Finance on this important
issue. As indicated above, we do not believe that any proposed solution which involves
substantial changes to the successful Canadian model for providing affordable lease financing to
consumers is required. Instead, we believe that the focused efforts already undertaken by the
Government are more than adequate to loosen up the credit markets and repair the balance sheets
of a few troubled market participants.
In reaching a final decision, we believe that the Government must, above all, consider the impact
of any change from a customer point of view and the long-term viability of the Canadian