Investigation opens into irresponsible lending in UK car financing market

3 August 2017

The UK’s Financial Conduct Authority (FCA) has revealed its plans for a review of the motor finance industry following complaints concerning the availability of Personal Contract Purchases (PCPs).

In April 2017, the FCA announced it was looking to open an investigation into irresponsible lending in the automotive market, particularly due to its place in a massive expansion of consumer credit. It was concerned that there was a lack of transparency in deals and that sales staff were failing to carry out sufficient checks to ensure consumers could afford the credit they were offered.

The financial investigation body has now outlined the key areas which it will be looking into. This includes whether dealerships are taking the right steps to lend responsibly, whether there are any conflicts of interest from commission arrangements and whether firms are managing the risk that asset valuations could fall.

′We are taking forward a range of work to help us to answer these questions, and to decide what further interventions may be necessary,’ the FCA said in a statement. ′This includes supervisory work with FCA-authorised lenders, detailed analysis of millions of anonymised credit reference agency records, and careful scrutiny of firms’ sales practices and processes.

′We are also 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. We will publish an update on this work in Q1 2018.

′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/or a lack of clarity for the consumer in their understanding of the contract,’ it finishes.

Responding to the announcement of an investigation, Stephen Sklaroff, director general of the Finance & Leasing Association (FLA) comments: ′Our members work hard to ensure they lend responsibly and treat their customers fairly. We note that the FCA has found that most firms address affordability in an appropriate way. We look forward to working closely with the FCA on affordability assessments in the consumer credit markets, and as it carries forward its exploratory work to develop its understanding of the motor finance markets. We welcome the FCA’s focus on vulnerable customers, and we have recently published our own new guidance for the lending industry on how best to identify and support such customers.’

Meanwhile, some dealerships are starting to fight back against what they see as a ′negative media outlook’ on a stable market, according to Automotive Management. The publication quotes Daksh Gupta, Marshall Motor Holdings’ chief executive, as saying: ′The media are coming to their own conclusions on PCPs.’ He went on to say that despite the media interest in consumers being offered credit when they couldn’t afford it, his group rejected ′8-10% of finance applications a year, with a default rate of just 0.7%.’