UK financial watchdog investigates car loans market

FCA is concerned about transparency, conflicts of interest and irresponsible lending in fast-growing sector

The City regulator is scrutinising the fast-growing car finance sector and has held discussions with the US authorities about the market.

Andrew Bailey, the chief executive of the Financial Conduct Authority, said the FCA wanted to understand what was going on in the car finance market. “What’s going on here? Does it mean there are more cars or [is it that] the form of financing has changed? I think it’s something to do with the latter rather then the former,” he said.

Lending on car loans is the fastest-growing part of the consumer finance market, which is growing at 10.3% a year overall. Within that, car finance is growing fastest at 15% a year, while credit card lending is rising at 9% and personal lending at 7%.

Bailey said his “hunch” was the market had undergone a structural change and was behaving more like a market for secured lending – such as mortgages – rather than an unsecured market such as credit cards or personal loans.

“It has become more like the US, more of a secured finance market than it was in the past,” said Bailey.

Regulators need to know if consumers will prioritise paying back a car loan before other forms of unsecured lending, such as credit cards or personal laons.

The FCA is concerned about a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry and after its review will decide whether it needs to take action to curtail the explosive growth.

Most of the growth has been fuelled by personal contract plans, which can start at less than £100 a month and with only a £100 deposit. Carbuyers never actually purchase the car, but make payments to cover the depreciation on a vehicle between driving it out of the showroom and handing it back, usually three years later.

Earlier this week, the Bank of England ordered banks to start setting aside more capital in the face of the rapid growth of consumer finance, such as credit cards, car finance and personal loans.

The Bank calculates there is £58bn of outstanding car dealership finance, with some 40% coming from banks. It says that 85% of new cars were bought with dealership finance in 2016 - up from about half in 2009.

The US has a longer established market for car finance and the FCA has been talking to regulators there about the implications. “If you talk to people in the US what they say is you need to view it through the lens of secured borrowing,” said Bailey.

Speaking to an audience at the British Bankers Association, Bailey said the regulator was keen to avoid taking any action that might push borrowers to illegal lenders.

“There are sections of the public who do have a justifiable need for credit but whose credit records are not necessarily straight forward,” Bailey said. “An example of this is where you’ve got people with increasingly erratic income.”

In January 2015 price caps on pay day loans came into force – at no more than 0.8% a day – which the FCA is monitoring to ensure that borrowers are not forced towards more expensive forms of credit.


Jill Treanor

The GuardianTramp

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