The Financial Conduct Authority (FCA) has said that it will continue investigations into the “risk of harm” posed by motor finance. In its motor finance investigation, the FCA revealed that it had already concluded that “the largest lenders’ approach to credit risk and asset values appears robust” and that “consumers in the lowest credit score range account for a relatively small share of motor finance lending.”
In July 2017, The FCA set out its plans to put the spotlight on motor finance and highlighted the key questions they wanted to answered. The FCA wanted to gain an understanding of the market and how consumers engage with motor finance firms and carried out a detailed analysis of millions of credit files to a mystery shopping exercise.
The main findings from the work done so far is that:
- growth in motor finance has been strongest for consumers with better credit ratings, who are less likely to face repayment difficulties
- arrears and default rates remain generally low, though they have increased moderately in recent years
- arrears and default rates are higher and have risen more, amongst customers with the lowest credit ratings, who account for around 3% of lending
- if not properly managed, some of the commission arrangements in place could incentivise dealers to arrange more expensive finance for customers
- in some cases, customers are not being provided with key information in an accessible manner, including information provided on lenders’ and dealers’ websites
- the largest lenders are adequately managing the risk of a severe fall in prices for used cars, but firms should regularly consider relevant changes in the market.
The particular areas of concern for the remainder of the review:
- whether firms are properly assessing whether customers can afford to buy the car they are being offered – particularly for people with lower credit scores
- how firms are managing 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 plans to tackle any areas of concern by the end of September 2018.
