THE Financial Conduct Authority (FCA) has published an interim statement on its review of motor industry finance.
The review was set up in July 2017 on the back of rapid growth in motor finance. The review wanted to assess whether motor finance was being sold correctly and wheterh the market could harm consumers.
Although the review predominantly focused on dealer finance and motor finance brokers, inevitably there has been interest in the way leasing brokers sell car acquisition products to consumers.
The FCA plans to finish its review in September 2018.
What are the aims of the FCA review?
- Are firms managing the risk that asset valuations could fall and making sure that they are adequately pricing risk?
- Are firms taking the right steps to make sure that they lend responsibly, particularly in terms of affordability?
- Potential conflicts of interest from commission arrangements between lenders and dealers and to the detriment of consumers
- Is the information provided to potential customers sufficiently clear and transparent, so that they understand the risks and make informed decisions?
So what are the findings so far?
To date, the FCA’s update looks fairly positive, although there remain areas of concern.
The FCA reports that:
Most motor finance growth has been to consumers with a lower credit risk. Thus the chance for arrears is less likely and default rates remain low. Nevertheless, the FCA has noted a recent uptick in defaults, especially those with a higher credit risk rating. As a result the FCA will be focusing on how lenders assess affordability.
In terms of a fall in used car prices, the FCA has found that the largest lenders are adequately managing this risk but cautions that “firms should regularly consider relevant changes in the market”.
The interim report has found that some commission arrangements incentivise brokers to arrange finance at higher interest rates. The FCA wants to assess whether lenders adequately control the risks and the potential for harm to consumers. The FCA added: “We are also testing whether commission structures have led to higher finance costs for consumers, because of the incentives they create for brokers.”
Clarity of information to ensure consumers make informed decisions. The FCA said it was assessing the customer journey, and was including a mystery shopping exercise to assess compliance.
What will the FCA be concentrating on?
For the remainder of the motor finance review period, the FCA said it would be addressing particular areas of concern.
- Affordability – particularly for people with lower credit scores
- Management of the risks around commission arrangements for dealers
- Whether consumers’ engagement with firms, and the information they are given, allows them to make informed decisions.
The FCA said it would set out its findings and plans to tackle any areas of concern it had by the end of September 2018.
Key facts from the FCA interim review of motor finance
Personal contract purchase (PCP) agreements have become particularly widespread, accounting for around 66% of the value of new and used car finance lending in 2017 (up from around 34% in 2008)
Representative CRA data analysed by the FCA showed that, while motor finance accounted for 16% of total unsecured debt for the consumers in 2013, this increased to 24% in 2016. The FCA found that more consumers were using motor finance to fund the purchase of vehicles, rather than financing the transaction in other ways. The average value of motor finance contracts in the FCA sample also increased, from just under £13.5k in 2013 to just under £15k in 2016 (an increase of just under 9.4%). This growth was faster than the general increase in car prices (which increased by around 3.5% over the same period), suggesting that the typical motor finance customer bought a slightly more expensive car or put a smaller deposit in 2016 than in 2013.