The Financial Conduct Authority (FCA) is conducting a wide-ranging review of the motor finance sector, which will conclude in September 2018. In March 2018, it published an update on the progress of the review.
The regulator’s main findings are:
- The growth in the sector has been most significant for consumers with higher credit ratings, who might be less likely to experience repayment problems
- Arrears and defaults are increasing “moderately” but remain fairly low. Arrears and default rates are higher for consumers with the lowest credit ratings, who account for around 3% of motor finance lending
- Some firms have been found to have commission arrangements that could encourage staff to arrange more expensive finance arrangements for their customers, thus giving rise to potential conflicts of interest. Where this is the case, the situation needs to be properly managed by the firm
- Some customers are not being provided with key information in an accessible manner
- Firms need to be alert to market changes, such as the risks of a severe fall in prices for used cars
The FCA adds that its areas of focus for the remainder of the review include:
- Whether firms are carrying out adequate affordability assessments, especially for applicants with lower credit scores
- How firms are managing the risks posed by their commission structures
- Whether customers are being provided with sufficient information to make informed decisions
Regarding the first of these, firms should note that an affordability check is not the same as a credit check, and that finance providers are expected to carry out an assessment of each applicant’s ability to make the required repayments.
Regarding the last of these, the FCA says it has seen cases where “relevant information is spread across multiple documents which may make it difficult for consumers to absorb key information,” and “where information is not sufficiently prominent and may not meet our requirements.”
Examples of the work being carried out by the FCA during the course of the review include
- Assessing lenders’ approaches to managing the risk of falling asset valuations
- Analysing customers’ credit reference agency files, to assess relevant trends and indicators
- Reviewing agreements between lenders and brokers/dealers to assess the potential for conflicts of interest
- Reviewing firms’ sales practices and processes
The latest publication from the FCA on the subject of motor finance acknowledges that “the motor finance sector has grown rapidly, largely due to the popularity of personal contract purchase (PCP).” The number of point-of-sale consumer motor finance agreements for new and used cars has grown from around 1.2 million in 2008 to around 2.3 million in 2017, and PCP now accounts for 66% of the value of new and used car finance lending, compared to 34% in 2008. Motor finance accounted for 16% of total unsecured debt for consumers back in 2013, a figure which had increased to 24% by 2016.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.