Oral evidence: Motability, HC 847
Wednesday 9 January 2019
Ordered by the House of Commons to be published on 9 January 2019.Watch the meeting
Work and Pensions Committee Members present: Frank Field (Chair); Heidi Allen; Rosie Duffield; Ruth George; Steve McCabe; Nigel Mills; Chris Stephens; and Derek Thomas.
Treasury Committee Members present: Nicky Morgan (Chair); Mr Steve Baker; Charlie Elphicke; Catherine McKinnell; and John Mann.
I: Sir Amyas Morse KCB, Comptroller and Auditor General, National Audit Office; Louise Bladen, Value for Money Director, National Audit Office; and Stephen Smith, Executive Leader, National Audit Office.
II: The Lord Sterling of Plaistow GCVO CBE, Chair, Motability Charity; and Paul Atkinson CBE, Director, Motability Charity.
III: Neil Johnson OBE, Non-Executive Chair, Motability Operations Ltd; Mike Betts, Chief Executive, Motability Operations Ltd; and Neill Thomas, Independent Non- Executive Director and Chair, Remuneration Committee, Motability Operations Ltd.
Examination of WitnessesWitnesses: Sir Amyas Morse, Louise Bladen and Stephen Smith.
Q139 Chair: Good morning everybody. Thank you very much for coming to this joint session of the Work and Pensions and Treasury Committees on Motability. We will start with the report that the National Audit Office has provided to the Committees. Can I ask the witnesses to introduce themselves briefly?
Sir Amyas Morse: My name is Amyas Morse. I am the Comptroller and Auditor General.
Louise Bladen: I am Louise Bladen. I am a value for money director at the National Audit Office.
Stephen Smith: My name is Stephen Smith. I am an executive leader of the National Audit Office.
Q140 Chair: Thank you for your report. In it, you stated that Motability Operations had generated an unplanned profit, which was “driven by inaccuracy” in its “forecast value of vehicles, which is typically lower than the wider market average.” That generated £826 million of total unplanned profit. Is the NAO’s conclusion that Motability Operations is deliberately undervaluing customers’ cars and therefore overcharging customers?
Sir Amyas Morse: I think the conclusion is not as stark as that, Chair. What we have seen, based on the evidence, is that there is a very prudent valuation practice—more prudent than normal in the industry. As a result, there is probably, arguably, some cost that is passed on to car lessors that might not have been.
Is it a deliberate plan to enable more to be charged? I am not suggesting that. It is rather more about having a super-prudent attitude, which is reflected in quite a lot of the way the business is set up, which is not really quite justified, based on the results over the last many years now.
Q141 Chair: Have you ever seen such a significant level of unplanned profit over a period of 10 years, which is what your report has identified?
Sir Amyas Morse: There are some quite unique features to Motability Operations and they are very much acknowledged. You will see in our report— perhaps if I quote from the chairman in his correspondence, which we reproduce in our report, where he says, “Motability Operations is…a unique organisation and in many respects is free of competition and enjoys a captive customer base in a relatively stable environment, with almost zero credit risk in relation to lease rental income.” When you have something like that, and you have a very prudent stance both on risk and on stock valuation, it is likely that if there is a variation in any direction, it will be in the upside direction. Indeed, Motability Operations has advised the charity to expect a series of substantial over-performances of available donations over the next few years, so it is thinking forward to that.
Chair: You recommend in the report that Motability Operations should review its approach to forecasting, so we can better understand. Perhaps you can expand on that remark. I am not sure who the best person is to do that.
Stephen Smith: One has to start by recognising that the market has been particularly strong in used car values for the last few years. However, as you have said, in looking at the residual values that they are pricing into the leases, what we have seen is that they have been consistently more cautious than other market participants.
Therefore, our recommendation, as you rightly say, is that they should look at why it is that they are consistently being more conservative, in terms of both other market participants and realised prices, bearing in mind the fact that they put a significant amount of effort into assessing the residual values.
Chair: Your report states that, on average, 43% of the cost of a lease is the car’s depreciation. Is there an issue with the overestimation of the depreciation costs, and what does that mean for customers?
Stephen Smith: The depreciation cost is struck after taking into account the residual value. Therefore, if you like, the lower the residual value, the higher the depreciation charge. We have estimated that, as a consequence, customers over the 10-year period to 2017 were overcharged by £390 million.
Chair: When we say customers here, as my fellow Chair has just whispered into my ear, we are really talking about taxpayers, aren’t we?
Stephen Smith: We are talking about the people who are leasing cars.Sir Amyas Morse: We are talking about people who qualify for mobility
Chair: But ultimately who is paying the mobility allowance?
Sir Amyas Morse: Perhaps this is the way to look at it: it is true that the Government are paying the mobility allowance, but once having been awarded it, the person receiving it is entitled to the full allowance. So if you assign the allowance to Motability, essentially the individual who is entitled to the mobility allowance is the customer.
Chair: But if you are the DWP looking at estimating mobility allowance costs going forward, wanting there to be sufficient money for people to be able to choose to use an excellent scheme such as Motability, obviously you will look at the costs that Motability has been charging, and one of those will be depreciation. You are saying that customers have been overcharged, which must eventually lead back to the taxpayer.
Sir Amyas Morse: That is true, but bear in mind also that Motability arrangements are complex. We have not made a great point of saying this overcharge is a systemic or deliberate thing. The reason we do not do that is that, later on, when the customer changes their car, they tend to get very generous good condition bonuses and things of that sort, so they get quite a lot of financial assistance.
Taking it overall, we think that there is a very heavy discount. If you compare what a person with mobility allowance pays compared with what they might pay in an ordinary leasing company, we think they are getting a discount of something like 40%. I would not go too far with the idea that there is a general overcharging of customers through the system as a whole; I do not think that is quite right.
Q147 Frank Field: But Amyas, all of us are agreed that this is a terrific scheme. There is no question about that. What we are looking at is the financing of it, and whether taxpayers can get a better deal. It is about, first, whether too much is being charged by the company for the product that they are giving and, secondly, whether people might not prefer to keep their cars rather than be bribed or subsidised to fit the company policy.
We are thinking about future developments. Nobody wants in any way to disrupt the scheme or to criticise it. It has been a wonderful initiative for people with disabilities, but it does not necessarily follow that it must be value for money for taxpayers. All the questions we have will ask, in different ways, could we not get this scheme for less money?
Sir Amyas Morse: I think it is worth while seeing it in fairly simple terms. Some of the contribution is not something that costs taxpayers money—giving the direct assignation of the mobility allowance gives cash flow assurance. In addition, there is the exemption from VAT that is of very considerable value. That really is costing taxpayers something—you can certainly say that.
Also, when income flows into Motability Operations, from whatever source, some of it is recycled into the rates that lessors pay for cars, some of it goes into improving services, some of it goes into making charitable donations to Motability charity, and some of it goes to meet the costs of the operation.
Clearly, if in any area the costs are higher than they could or should be, evidently that money is not being spent on providing or improving the services, or providing charitable donations. In some ways, it is worth looking at it that way and saying that the actual costs of running the operation need to be optimised against what is being delivered. Obviously, you will appreciate that that includes remuneration.
Q148 Frank Field: But do you think an organisation that is totally dependent on taxpayers’ money should also then be deciding that some of that money should go to charity? I am not saying the charity is wrong or that it doesn’t do great things, but I find it a rather strange state of affairs. Do you?
Sir Amyas Morse: I would just say that that was what was envisaged. When the scheme was set up in the way it is, it was envisaged that there would be a degree of bringing private sector skills into the picture. It wasn’t simply a question of saying, “We just want you to break even.” The desire to bring business skills into running a successful operation was part of the original concept. I know you will hear a lot more about that from Lord Sterling, but I think it is fair to say that the interesting thing about the Motability project was that it sought to harness business skills alongside providing a public service.
Frank Field: Harness business skills, or pay?
Chair: Let’s come on to pay in a moment.
Q149 Nigel Mills: Amyas, I think you said that the organisation benefits from £888 million-worth of tax benefits a year. Presumably the logic of giving those tax benefits was that they were needed to make the scheme viable, not to make the scheme hugely profitable or able to give charitable donations. Is your view that the criteria that the Treasury and HMRC use to give such tax exemptions are being met here, or is that not a good use of them?
Sir Amyas Morse: I don’t think it has been reassessed for a long time. One of our recommendations is that it all needs to be considered. I was called upon to do this report by the Government, so the report is addressed to the Government. We think that the Government need to consider the basis on which they participate.
Q150 Nigel Mills: When you are auditing HMRC or the Treasury, you are going to be concerned that there is £888 million-worth of tax benefits being granted without any understanding of whether they are actually needed to achieve the aims of that organisation. Is that an issue that you would now want to take up when you audit HMRC or the Treasury?
Sir Amyas Morse: Quite possibly.
Louise Bladen: We have said, in previous reports when we have looked at those kinds of issues, that regular review of those kind of arrangements is important. That is something we have said in our past work. It is important to note that, with the tax concessions, of the 44% cheaper leases, we are saying in the report that about two fifths of that are accounted for by the tax concessions.
The other three fifths are perhaps more indirect, in terms of the economy of scale and the substantial discounts that Motability Operations is able to get, based and building on the tax concessions.
Q151 Chair: Let me move on, because I am conscious of time, and I want to bring Catherine in. One of the other areas that you mentioned in your report was the one-off £400 million donation by Motability Operations to Motability, which appears to just be Motability Operations passing on its reserves to Motability for it to use as reserves. Can you unravel that for us?
Sir Amyas Morse: Motability as a charity presumably has an obligation, and one of the things we comment on is that it is not clear to us that it has a long- term strategy for what it will do in terms of planned donations. If it is going to receive a consistent pattern of substantial contributions from Motability Operations, which it expects to do, then it should be able to show us that it has a strategy for the use of that.
The other question is that if there are such substantial sums going to be paid into the charity, are the Government happy that they have a sufficient say in what will happen to that, or are they happy for the charity trustees to make those decisions on their own account?
Q152 Catherine McKinnell: The £400 million is 14 times Motability’s annual
spending. I appreciate that the National Audit Office report has suggested it should develop a long-term strategy based on a broad and open consultation to set out how it plans to spend that money, but do you think it is realistic to expect Motability to be able to spend that money effectively and efficiently?
Louise Bladen: With the £400 million coming in last September and the plans that Motability has looked at for how it might spend that money currently forecasting that those sorts of plans might cost about £100 million a year for the next five years, but on the basis that they also expect £100 million in, you have effectively got a surplus fund of money, and we say in the report that it is about £500 million to £600 million, so effectively that is sitting there. With the flow in and flow out, that potentially remains as it is.
Q153 Catherine McKinnell: So the answer is no.
Louise Bladen: We haven’t seen plans to use that scale of money.
Sir Amyas Morse: We deliberately make that point. It is not clear to us that there is a strategy for using that substantial amount.
Stephen Smith: I wanted to make the points that, first, the £400 million was just paid out of the 2018 profits of Motability Operations with £100 million left over, and secondly, on the basis of the fact that, with the exception of two years, one of which was 2008 when they still made a profit, they have always made more than £200 million a year. So it is not just how you spend the £400 million; it is how you deal with the future profits that Motability Operations is likely to make.
Q154 Catherine McKinnell: People listening to this will be scratching their heads. Last month the Work and Pensions Committee took evidence that 75,000 disabled people have lost their Motability vehicles as a result of the Government’s transfer from DLA to PIP, and that figure is likely to continue.
I don’t know whether you have done an assessment of the number to be affected by 2020, but ultimately this does not seem to be a problem that will go away. It seems to be an issue that will get bigger for the charity and the number of people they support.
Sir Amyas Morse: I think that is right. In fairness, I would say that the charity has provided some transitional support to people affected or in transition on PIP. They will tell you that, I’m sure. But I do think there is a basic problem. If this scheme works for you, you get a fantastic deal. If it doesn’t work for you for any reason, what sort of deal do you get? We still find it mysterious—this is as much a comment for Government as it is for Motability—that there really isn’t an understanding of why more people do not sign up for this scheme, given that it is such a good deal. Whether those people who qualify for mobility allowance but who aren’t members of the scheme should get some ability to participate is something the Committee might consider—in the benefits, I mean.
Q155 Catherine McKinnell: But what about the unplanned profit and its transferring into charitable donations? One of the issues is the forecast in the value of cars, which you have identified already. It means that customers
have been charged £390 million more than was required in their lease agreements. Are the disabled people who have been overcharged in the Motability Operations now effectively subsidising other disabled people in order to then receive from the charitable arm?
Sir Amyas Morse: The £390 million is a significant number accrued over quite a long number of years.
Stephen Smith: It has accrued over 10 years. Obviously, if one takes that into a per year basis, it is a lot less. It is more the way, if you have a systemic conservatism, it compounds up.
Q156 Catherine McKinnell: But what about the question I asked? Is it not the case that disabled people are effectively subsiding a charitable donation to other disabled people?
Sir Amyas Morse: Yes, that is probably true. If you said, “The mission here is to run this on a break-even basis,” I suspect you could probably provide this service for less than the whole mobility allowance. It would be interesting to hear what Motability Operations has to say about that, but I suspect that it wouldn’t really disagree with that concept.
Q157 Catherine McKinnell: One other issue that has been raised with me by constituents is the very high advance fee that Motability Operations customers have to pay. The minimum is £300, I understand. That is a lot of money to find for somebody in receipt of PIP. Is that something that you have looked at? Should it be part of the considerations, in terms of how this money would be better spent?
Louise Bladen: We did look at this. We found that, under the scheme, there are three options. There is paying in advance payments, so you can effectively get a better car. You can take a car that is at the level of the mobility allowance, so you never see a refund or a payment. A small number of people choose leases that are less than that, so they get a bit back each week from the mobility allowance.
The vast majority of customers opt to make the advance payment, and that ranges, depending on what kind of car you are trying to get to. What we are interested in is any kind of research about the incentives for people and what that means for the customer base, because 85% of them are somehow able to make the advance payment to afford those cars.
Stephen Smith: I think it would be fair to say that there are about 300 cars that can be got without having to make an advance payment. It is an important KPI for Motability Operations.
Charlie Elphicke: May I ask you about remuneration—the pay of the top brass? It says here: “In recent years, the charity has become concerned about the reputational consequences of high levels of pay”. They were particularly concerned because “Motability Operations executives managed a monopoly and so were not responsible for growing the business in a highly difficult and competitive environment”.
They also said that “the executives are only one step removed from public service given the scheme’s turnover is dependent on public funding and is in receipt of tax concessions.” Do you think the charity is right to be concerned that the top brass are overpaid?
Sir Amyas Morse: Yes, they are certainly entitled to be concerned. We deliberately put some of the correspondence into the report. The first question is, are there reputational issues around this? The answer to that is, clearly there have been sustained reputational issues. We decided to accept the call to do this, which is outside our remit, because we don’t think these issues will go away unless there is some change. That is why we stepped forward to do this report. If I compare the level of pay with the BBC or other very substantial semi-public bodies, it is clear that the pay is at a higher level than that. We say that in our report.
Charlie Elphicke: So they are paid even more than the BBC?Sir Amyas Morse: They are paid more than the BBC.
Charlie Elphicke: Gosh! That’s a lot, isn’t it?
Sir Amyas Morse: I am not necessarily saying it is a lot; it is just more. It is
more than the chief executive of Crossrail. Equally, I am quite sure—Steve McCabe: Did you say more than the chief exec of Crossrail?
Sir Amyas Morse: Network Rail—excuse me. Wrong word.
Chair: I am not sure that gives us much more reassurance, actually.
Charlie Elphicke: So they are paid truly eye-watering sums. Do carry on, please.
Sir Amyas Morse: But they would say, and not unreasonably, that their scheme has been to try to produce a pay structure that will attract the best talent from industry, so it needs to compare with what leading industry performers—let’s say FTSE 250 executives—would get. That is what they are aiming to do in the pay scheme.
In a way, even looking at that, I would say that the bonus structure that you see in place, if it is going to be motivational rather than simply part of the base pay package, needs to be something that won’t be achieved on every occasion—certainly not achieved to the maximum. What we actually found was that, over the life of the reward scheme, over 90% of the available bonuses have been achieved every year, so it is difficult to see that as having been something that induced extra effort. You could take a view that this is really more or less part of the basic expectations, because it went on for such a long time at such a high level of performance.
Charlie Elphicke: So it looks like, if I understand it correctly, there are some quite serious governance failings, because the report also says that all of the performance targets for these bonuses were achieved in every year of the scheme’s operations. The total value of benefits paid out under the scheme between 2011 and 2017 was £15.3 million, a fourfold increase at a time when the general population have hardly seen a pay rise at all. Do you think
that that is justifiable?
Sir Amyas Morse: I am clearly putting it forward as something that I think needs to be reviewed by Government at a fundamental level. Is this okay, given Government’s key part in enabling Motability Operations to exist? Personally, I think there is a question about how effective governance input has been.
There has been a challenge under the governance system, and I think it is fair to say that it has had some effect but not a full effect. The question is how we get to a position where governance input from the charity—if that is how it continues to be—has really got a grip on limiting the level of pay.
Q163 Charlie Elphicke: Do you have recommendations on that?
Sir Amyas Morse: We think that a basic review of the relationship between
the charity and Motability Operations needs to take place.
Louise Bladen: We also say that a review of the performance framework is needed, because, as you rightly say, that was put in place in 2008 for the long-term incentive plan, at a point when the business had been through a turnaround, but the excellent objectives were set at a lower level than had already been achieved. We think the performance framework needs to be looked at to ensure that it genuinely is stretching.
Q164 Charlie Elphicke: The other thing I noticed in the report was the question of whether there was transparency. It says that “the chief executive continues to benefit from separate and additional remuneration arrangements, the full value of which has not been previously disclosed.” Is it hidden?
Sir Amyas Morse: Let me just distinguish between two different things. One of them is the question of what the law requires on corporate reporting. What has been disclosed in the past has been the minimum level of disclosure that is legal, and therefore we don’t challenge that. We note that in the last year the disclosure in the accounts of Motability Operations has increased a lot— quite clearly it is possible to disclose more, and Motability Operations is now doing so.
The other question for the Committee to consider is: when you had an evidence session with Motability in which you discussed pay, were they frank with you? That is not to be confused with the question of whether they were complying with their statutory obligations on public reporting of pay; those are two different subjects. The Committee is the best judge of whether they were frank with you in what they said. At the time of the hearing, they did not bring out that hard number. Subsequently, they made a written submission to you, and they refer to the fact that those payments may continue to rise—I think they don’t give a hard number there either.
Louise Bladen: The written submission you received afterwards was very long, and the number is quite in the depths of that. They disclosed at that point what they had expected the chief executive’s scheme to be worth in 2015. By March last year there was an actual number known, so reasonably that could have been the number that was disclosed.
Q165 Chair: Were they not open with us?
Louise Bladen: You didn’t get the number that we have put in our report and
is now disclosed in the Motability Operations accounts for 2018. Q166 Charlie Elphicke: How much is this hidden money?
Louise Bladen: It is an arrangement for the chief executive. At the end of 2018, it was worth £1.86 million. We say in our report that if that continues to 2022, it will be worth £2.2 million.
Q167 Charlie Elphicke: I want to pick up on that, because it is important. We are talking about £2 million of money that is not disclosed. You say that you are being frank with the Committee, but let me ask about the legal position. The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008—I am sure everyone is an expert on them—require “the aggregate amount of remuneration paid to or receivable by directors in respect of qualifying services” to be shown.
Did Motability Operations comply with that requirement if the money owed to the chief executive in respect of the long-term incentives was not included in the accounts? Was the law broken?
Louise Bladen: Our understanding in interpreting those requirements is that the operative word is “receivable”. Motability Operations’ judgment was that that money at that point was not receivable. That is the judgment that they made.
Q168 Charlie Elphicke: One last thing. Sir Amyas, in response to Catherine’s questions you said that if Motability Operations were very efficient, they could provide their services for less than the allowance, if I understood correctly. Could taxpayers actually get a better deal out of this, and could taxpayers’ money then be used to provide greater help in other areas to disabled people?
Sir Amyas Morse: In some ways, the answer to that may be yes, but can I just take a second to record the fact that we are talking about a success? It is very seductive to start picking a success to pieces. Therefore I am just going to say that to you. The reason we are having this conversation is because this has been much more successful than anybody expected. That was after some years—I know you will hear all about this later—of a quite long period where it did not work very well. It is actually a success. Now that we have prolonged success, it means we have different issues to deal with, and we need to address them.
Now that we know that it can be done and that it works this way, can we press down on the margins and the cost? I think that is a reasonable challenge to make. If we did any more work on this—we have a mandate for three years—we might look at the cost structures and so forth and see where they are.
Should they already have done all that? I am not sure I am even saying that, but now that we are looking at a sustained success that is kicking out
substantial over-profits, it is not unreasonable to say, “Can we squeeze down on that and run a leaner operation and deliver more into the public sector?”
Q169 Charlie Elphicke: That is a very fair point. Can I briefly pick up on that? Because it has a monopoly position and is run efficiently, it is doing very well. Yes, it is a success, but like all monopolies are they not better off regulated so that the amount of value can be managed properly, as happens with the utility industry?
Sir Amyas Morse: That is certainly one possibility.
Q170 Frank Field: Amyas, when you talk about “squeeze”, you are talking about a
salary that is 10 times the Prime Minister’s.Chair: An overall package.
Sir Amyas Morse: I was talking about squeezing the whole cost structure; I had moved on. Although the salary is important, if you are asking the strategic questions, it is just a feature of the situation. The really important point is the relationship between how much it costs to run the operation and what it is delivering.
Frank Field: It is the outward, visible sign of what is going on beneath it all, is it not?
Q171 Ruth George: Carrying on with the theme of value for money, Motability Operations enjoys considerable levels of customer satisfaction. They are extremely high, and it has invested very heavily in that. Customer support has almost trebled from 2008, but that has not delivered a great deal more customer satisfaction because it was high anyway. Does the amount of customer support being offered seem value for money?
Stephen Smith: You are right to say that when you are delivering that level of customer service and customer satisfaction, there is a risk that additional spend becomes nugatory. We found that we could not identify any framework that Motability Operations use to satisfy themselves that this additional investment was delivering value for money. Therefore, one of our recommendations is that they should institute such a framework that takes into account the alternative uses of the funds within the scheme as a whole.
Q172 Ruth George: We would obviously not argue against high levels of customer satisfaction, particularly given the customers involved, who are often quite difficult to work with.
On insurance, I notice that since they took over in 2013, the average is about £800 a year, which seems quite high for cars that have a relatively low mileage and a very low customer risk profile. Did you look into the value for money on the insurance side?
Stephen Smith: No, we did not. But it is fair to say that, when Motability talks about the package being 44% cheaper than the wider market, that takes into account the totality of the package, including insurance, roadside assistance and servicing costs.
Sir Amyas Morse: It is also worth bearing in mind that you are insuring people with special needs and possibly with some unusual insurance characteristics, so going to the market might not be easy for this sort of insurance.
Q173 Ruth George: That is accepted, but the market might be making high profits out of such people as well, as is often the case with insurance and people with illnesses and disabilities, unfortunately.
Sir Amyas Morse: Sure.
Stephen Smith: May I make one point on insurance? Motability have substantially taken on insurance risk themselves, except for claims in excess of £25,000, which they have reinsured. Therefore, to the extent that loss experience is less than that reflected in the lease pricing, that will flow back into the profits of the scheme as a whole.
Q174 Ruth George: That brings me on to looking at reserves, because essentially the profits are going into reserves, which have increased fivefold since 2008. At the same time, the number of customers increased by just 20%. You remarked on the subject of reserves that you felt that Motability should commission some external benchmarking on the levels of reserves held by Motability Operations. Should it be for Motability to do that?
Sir Amyas Morse: It is the sort of thing that you would expect an operation to do. You would expect the governors of the operation and the board of the operation to say, “Is this an appropriate level of reserves? Is it necessary to carry this level of reserve? Is this really reflected in the risk experience that you need to carry these levels of reserves?”
I appreciate that the reserves represent cars not money but, none the less, this level of reserves is much higher than we see in other car-leasing companies. Considering what we said before about the low risk and the low risk on renewal and so forth, and the relatively monopolistic nature of this, it seems surprising to us.
Stephen Smith: Also, the very success of Motability Operations in managing the risks that they have taken on does suggest that the prudence that might have been appropriate when they first took on these risks is less justified now.
Louise Bladen: Insurance would be a good example of that; a risk that they have taken on might have meant in the past that they would need to increase reserves, but now, when they are in a more stable position, that is less justified.
Q175 Ruth George: So, they are putting a lot of money into customer service and support without particular satisfaction back, and the reserves are skyrocketing, as well as executive pay. Shouldn’t the company simply be reducing the prices?
Sir Amyas Morse: That may be one way of doing it. You could say that instead of assigning the whole of the mobility allowance, you don’t need to assign all of it to get this deal. There are things like that that could be done.
If you look into the future for Motability and say, “Unless we change something with this model, it is going to kick out a lot of extra value.
By the way, if we adjust the pay and everything else, it might kick out more, assuming it continues to be successful,” where do we want that value to go? That is a discussion that the Government need to participate in. It is worth noticing that the Government used to be more involved in Motability than they are now. They are hardly involved at all now.
I think they need to recognise that they are a major underwriter, albeit not an explicit stakeholder. They need to take a much more active part in this in shaping the future and in being part of guiding the future forward.
Q176 Ruth George: Thank you. The Government’s role and price reductions weren’t explicitly part of your report and recommendations. Why was that the case?
Sir Amyas Morse: Not because we are shy of saying things like that, but because reducing prices is one specific option. You could say, “There is a lot of excess value being generated here. You could reduce prices, or you could decide to spread some benefit to other people who qualify for mobility allowance.” There are quite a lot of options, and we haven’t got involved in running the options debate. We think the Government need to decide how we are going to take this forward. To the extent we can help them in that debate, we are willing to do so.
Louise Bladen: We have got a couple of recommendations for the Government in the report about reviewing the value and impact of the support they provide, and having some clarity about what they think mobility allowances should be about. That is important. We have another recommendation about the Government’s role in helping Motability Operations and Motability understand the wider potential customer base and why some people don’t get involved in the scheme.
Q177 Ruth George: Can I just ask one small question? You said that the majority of customers pay an advance payment before their lease. Does Motability offer end-of-lease cars to customers at a discount, which would give them another option, but one that didn’t tie them into Motability?
Louise Bladen: As we said earlier, the scheme runs on a very limited package: it is a three-year lease and 60,000 miles. Typically, those options are not available. The idea at the end of the lease is that, if you want another car, you take out another lease on a different car. There are some odd examples, in terms of very adapted wheelchair-accessible vehicles that can run for longer than a three-year lease. There are some particular terms for those very specialised vehicles, but generally speaking Motability Operations offers one package.
Ruth George: Okay. It is just that we heard in the previous session that those adaptations are all ripped out, then the cars are put on the market. That seems pretty wasteful when you have customers who could use them and be given first offer on those vehicles.
Q178 Frank Field: But 95% are not adapted at all? Is that not right?
Louise Bladen: Most aren’t adapted. The adaptions that are offered as part of the standard package are free of charge anyway; they are standard. It might be things like having an automatic, if that makes it easier for you to drive.
Sir Amyas Morse: When you take up that point with Motability Operations, as I am sure you will, they will probably say to you, “Look, we are able to get cars at this discount because we agree that we are going to hold them for a certain period. We can put them back into the second-hand market at a reasonable price at this stage. If we hold them for longer, they will drop in value a great deal more.” They will have arguments about why it makes sense to run the scheme the way they do. It is probably a lot simpler to run if you are just running one model of scheme, I would guess.
Q179 Heidi Allen: Following on neatly from that and on how involved the Government have been so far and whether that needs to change, remind us, to set the scene, how much financial support the Government give to Motability directly and indirectly.
Louise Bladen: The financial support is not direct; it’s in the form of tax concessions. In our report, we estimate that in 2017 the maximum was £888 million for the year. That is made up of various types of VAT exemption and insurance premium tax.
Q180 Heidi Allen: You could argue whose money is it: taxpayers, the recipients of PIP, DLA and so on. That is public money. That is Government money that comes from taxpayers, too. I want to explore the monopoly concept and whether it’s time to let other competitors come into the field. I don’t think that was something you put in your report as a conclusion. Do you have a view on that? Would Motability not be able to operate as well if there were competitors and a credit rating and so on?
Sir Amyas Morse: It is fair to look at it like this. There is a tax concession and also the relative monopoly position and the direct payment of mobility allowance from Government into Motability, supposing the customer decides to take a lease. There is no credit risk. These are the big advantages.
If you decided that you wanted to have effective competition, in order to make Motability more accessible to competition by the rest of the industry you would have to take some of those advantages away, because right now people could take a mobility allowance and go and get a lease somewhere else. It is just that they would be pretty stupid to do that with a 40% discount on costs.
If you said, “We want to have a more open market,” you would have to decide that that will mean, to some extent, more expensive leases for people on mobility allowance. You would be taking away in order to create competition. I do not have in my mind a model where you let other people dip into these advantages.
Q181 Heidi Allen: Why not?
Sir Amyas Morse: That’s interesting. We just haven’t thought about how that could be done.
Q182 Heidi Allen: If it’s a sector that the Government decides it wants to back because it is for vulnerable people, and if those advantages were made available and there was a level playing field, would that ultimately drive prices down for the consumers who need these cars?
Louise Bladen: It could, but the opposite argument is that part of the reason Motability Operations can get a 44% discount is because of the big economies of scale of one company doing this. On the opposite side, you potentially lose some of that because you would not necessarily have those economies of scale operating.
Q183 Heidi Allen: Has any analysis been done around what the sweet spot is with two or three operators in the field and economies of scale?
Sir Amyas Morse: We have not done that as part of this piece of work. Q184 Heidi Allen: Is it something that Government should look at?
Sir Amyas Morse: You raise a good challenge: is there a completely different model for providing this? I think it is reasonable to look at that. However, I will repeat that it is nice to have a problem based on success to talk about.
Chair: That is duly noted.
Sir Amyas Morse: So I am not in a big hurry to say, “Why don’t we see if we can fiddle around with this model and make it completely different?”, then— whoops!—we’re back to having the failure that there was before. I would be fairly prudent about it. Would we look at it? Yes, of course. But are we looking at it with a very strong expectation of completely changing it? That might be appropriate if you thought this current model was doing a really bad job, but what we have tried to say in this report is that in many ways this is a success. There are things that, as a result of sustained success, now need fixing. We don’t think it’s moot. We don’t think either the charity or Motability Operations has moved far enough in response to its success. That is our message.
Stephen Smith: It is worth saying that it is success both financially, as we talked about, but also in terms of the customer experience, according to all the feedback that we have seen.
Chair: You might need to speak up a little, because I can see people in the Public Gallery are straining to hear you.
Stephen Smith: We are talking about success not just financially, but in terms of the customer experience and all the feedback that we have seen.
Heidi Allen: And it needs to be easy for people who need those cars; it shouldn’t be difficult suddenly.
Chair: Heidi, do you want to ask about the beneficiaries? I am conscious of time, and we will need to move on.
Q185 Heidi Allen: I have just one quick, plainly worded question. Are you saying
that we should encourage the Government to look at remuneration—the profitability and the whole cycle of money between the operations and the charity—rather than break the competition model and encourage other operators to come in?
Sir Amyas Morse: If you ask me for a conclusion, I would say that is true. I think this is an unusual enough model within Government that we cannot say, “Oh, why don’t we just get rid of it,” for no particularly good reason. You need a much more muscular governance model to have a grip on what is going on, and for Government to be awake to this stuff.
Q186 Frank Field: Amyas, do you think we need the banks in this model?
Sir Amyas Morse: They have provided a useful base for Motability to borrow at good rates. We have not put a finding in the report that says, “We don’t think you need the banks.” I think it does underpin the model.
Q187 Frank Field: I meant the charge that the banks make on the scheme— another bit of money for old rope, isn’t it?
Sir Amyas Morse: It is money for money.
Stephen Smith: There are a few components. One is the remuneration of preference shares, which is about £700,000. Another is the management fee of £745,000. The major component is the interest and capital market fees earned, which is about £17 million.
Q188 Heidi Allen: Given this slightly unusual relationship between Government, the operations and the charity, we are still not accessing all the people out there who might need and like a car. DWP gets a little bit involved in sending out leaflets. How can that work better?
Sir Amyas Morse: There were very mixed messages. Motability was asked to investigate why more people were not taking part in the scheme.
Heidi Allen: It is currently 36%, I think.
Sir Amyas Morse: They have not made an awful lot of progress in that, nor
have they been vigorously affected by Government.
Louise Bladen: Yes, because ultimately it would need the Department for Work and Pensions to make available its data about people who receive mobility allowance.
Q189 Heidi Allen: Are we content with that? If we are concluding that we are broadly happy with the model and that we do not want competition to come in, shouldn’t that data be shared?
Louise Bladen: We asked the Department why it could not make that available, and it largely comes down to GDPR-type concerns about making that data more widely available.
Sir Amyas Morse: Although there is nothing to stop the Government carrying out this exercise themselves, which might be better than asking the provider to analyse why people are not buying their services. It might be better for the Government to do this themselves and say, “In order to carry out our role as