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.

Contributor

Jill Treanor

The GuardianTramp

Related Content

Article image
Financial regulator adds UK car loans to household support strategy
FCA reacts to surge in vehicle owners seeking help with repayments in £75bn market

Joanna Partridge

09, Apr, 2020 @8:44 AM

Article image
UK car loans and pawnbroker payments freeze extended
FCA also gives further support to buy-now-pay-later and rent-to-own customers

Jasper Jolly

03, Jul, 2020 @8:30 AM

Article image
Car finance crackdown will save buyers £165m, says watchdog
FCA says it will ban commission for brokers linked to interest rate paid by driver

Julia Kollewe

15, Oct, 2019 @11:39 AM

Article image
Car finance firms urged to halt repossessions during Covid-19 crisis
FCA to bring in measures to help customers over vehicle payments and payday loans

Mark Sweney

17, Apr, 2020 @7:43 AM

Article image
Loyalty penalties on UK car and home insurance to end
People who automatically renew policy are often charged higher premiums than new customers

Hilary Osborne

28, May, 2021 @10:13 AM

Article image
RAC facing refund costs over breakdown cover renewal letters
Insurer accused of breaching FCA rules intended to make price rise clear to consumers

Miles Brignall

03, Apr, 2018 @4:32 PM

Article image
Watchdog investigates Bank of England security breach
Threadneedle Street says access to press conferences via back-up audiofeed unacceptable

Jasper Jolly, Kalyeena Makortoff and Richard Partington

19, Dec, 2019 @7:35 PM

Article image
Will cheap car loans steer Britain to a financial crash?
The car-led consumer credit explosion must be controlled, perhaps by bringing in affordability rules as with mortgages

Patrick Collinson

08, Jul, 2017 @6:00 AM

Article image
The financial watchdog may have finally brought insurers to heel
The FCA’s honest, simple ban on ‘price walking’ could end a long-running business model that punishes customer loyalty

Nils Pratley

22, Sep, 2020 @6:33 PM

Article image
FRC investigates ex-Carillion directors over financial reporting
Accounting watchdog scrutinises statements prepared by Richard Adam and Zafar Khan from 2014 to 2017

Julia Kollewe

19, Mar, 2018 @9:55 AM