Financial authority offers update on PCP suitability concerns

11 April 2018

As vehicle sales in the UK decline, the pressure is being felt across all aspects of the market. This includes the financing sector, which is undergoing an investigation into how affordable some deals are for consumers.

The country’s Financial Conduct Authority (FCA) is currently looking into whether companies are properly assessing whether customers can afford to buy the vehicles which they are offered on credit.

Many consumers buy new vehicles using a Personal Contract Plan (PCP), which allows them to make payments over three years and then trade the vehicle in for a new model, with their old vehicle moving onto the used market.

The FCA set out its plans for an investigation in July 2017 and has now provided an update. The group has a range of work underway to build a stronger understanding of the market and how consumers engage with motor finance firms. These include carrying out a detailed analysis of millions of credit files to a mystery shopping exercise.

So far, the FCA has found that growth in motor finance has been strongest for consumers with better credit ratings, who are less likely to face repayment difficulties. Additionally, arrears and default rates are higher and have risen more among customers with the lowest credit ratings, who account for around 3% of lending.

The study so far has also found that if not properly managed, some of the commission arrangements in place could incentivise dealers to arrange more expensive finance for customers. In some cases, customers are not being provided with key information in an accessible manner, including information provided on lenders’ and dealers’ websites.

′We are working closely with the Bank of England and the Prudential Regulation Authority, who are considering the risks raised by the expansion of motor finance that fall within their regulatory remit, The FCA said when it began the investigation.

′The Prudential Regulation Authority notes that a PCP agreement creates an explicit risk exposure to a vehicle’s guaranteed future value (GFV) for lenders. We consider that direct consumer risk exposure may be more limited, but may be heightened where there has been an inadequate assessment of affordability and a lack of clarity for the consumer in their understanding of the contract,’ it finishes.

For the remainder of the review, the authority will focus on whether firms are properly assessing if customers can afford to buy the car they are being offered, particularly if they have a lower credit score. They will also see how firms are managing the risks around commission arrangements for dealers, and whether consumer engagement with firms and the information they are provided, allows them to make informed decisions.

The FCA expects its review to be concluded by September 2018.