UK watchdog to probe booming car finance market over fears of irresponsible lending

20 April 2017

The UK’s financial watchdog is planning to investigate the British car finance market, which is behind a massive expansion in consumer credit, to ensure that people are able to pay back their loans. 

The Financial Conduct Authority (FCA), setting out the probe in its annual business plan, is to investigate concerns of a lack of transparency in finance deals, potential conflicts of interest in the finance arrangements, and will examine whether sales staff are carrying out sufficient checks to ensure customers can afford their monthly payments. 

The news follows concerns by the Bank of England financial policy committee this month which stressed the risks as rapid growth in UK consumer credit continues. The annual growth rate for UK consumer credit soared to 10.9% last November, before slowing over winter, which made it the fastest growth rate since 2005, as household debt built up to the financial crash. The financial crisis also harmed Britain more than most of its European neighbours. 

While the UK car industry is still booming, concerns are growing about its ever-more debt-financed growth, which is delaying an expected considerable natural decline. The industry has been transformed by a huge upsurge in Personal Contract Payment (PCP) car loans. Now the dominant form of car loan, PCPs require a fixed period from which there is rarely the ability to opt-out. This risks trapping people in debt spirals, if proper checks are not made. 

More than two-thirds of cars in the UK are now financed by a highly attractive suite of finance agreements, which not only energise sales, but also crucially keep customers coming back – taking out a new finance package on a new model every two or three years. This gives dealerships strong financial security, with a predicable supply of used cars for resale. 

In some dealers, 90% of cars are financed this way – making it increasingly crucial that rock-solid credit checks are made by the dealers to ensure the health of the industry, and prevent government action. 

Advances on car loans reached £32.7 billion (€38.9 billion) in Britain in 2014, and last year the industry’s trade association said it was running at more than £31 billion (€36.9 billion).