Consumers’ use of motor finance has grown rapidly in recent years, with many credit products now available.
As we set out in our Business Plan 2017–18, we are looking at this market to develop our understanding of these products and how they are sold, and to assess whether the products cause harm to consumers and if the market is functioning as well as it could.
The market for motor finance
Since publishing our Business Plan, we have continued our work to identify potential areas of consumer harm in the motor finance market.
The majority of new car finance is now in the form of Personal Contract Purchase (PCPs), a form of Hire Purchase. The key feature of a PCP is that the value of the car at the end of the contract is assessed at the start of the agreement and deferred, resulting in lower monthly repayments.
PCPs provide the flexibility to own the car at the end of the agreement by paying the deferred value (‘Guaranteed Future Value’, GFV), or to enter into a new agreement (using any equity built up over the course of the existing agreement). The consumer also has the option to simply give the car back, but they will often incur any excess mileage and/or damage costs.
Consumers may also be approached prior to the conclusion of their PCP agreement with the offer of entering into a new agreement, if equity has been built up. We have found that this is a key driver for brand loyalty that many customers find attractive.
The Prudential Regulation Authority notes that a PCP agreement creates an explicit risk exposure to a vehicle’s GFV for lenders. We consider that direct consumer risk exposure may be more limited, but may be heightened where there has been an inadequate assessment of affordability and/or a lack of clarity for the consumer in their understanding of the contract.
Although PCPs are popular with consumers, they are obviously not the only form of motor finance and remain less prevalent in used car sales. We have identified an extensive range of products across the market: some based on ultimate vehicle ownership (either as an option, or a condition); and others based on ‘usership’, with no requirement to purchase.
We also recognise that the terminology used in the motor finance market is not universal and may be confusing. We consider it essential that consumers understand the risks and particular features of the motor finance they are taking on.
We have established that lenders may apply price and commission caps on their broker/dealer partners, and that new car offers/promotions are often heavily supported by manufacturers (often with fixed rates of interest). For used car sales, particularly where there is no finance subsidy or deposit contribution, there may be a greater risk that the finance aspect of a car purchase is used to generate a margin on the sale.
Our current work
Based on our work to date, the key questions that we are now focusing on are:
- Are firms taking the right steps to ensure that they lend responsibly, in particular by appropriately assessing whether potential customers can afford the product in question?
- Are there conflicts of interest arising from commission arrangements between lenders and dealers, and if so are these appropriately managed to avoid harm to consumers?
- Is the information provided to potential customers by firms sufficiently clear and transparent, so that they can understand the risks involved and make informed decisions?
- Are firms managing the risk that asset valuations could fall and ensuring that they are adequately pricing risk?
We are taking forward a range of work to help us to answer these questions, and to decide what further interventions may be necessary.
This includes supervisory work with FCA-authorised lenders, detailed analysis of millions of anonymised credit reference agency records, and careful scrutiny of firms’ sales practices and processes.
We are also working closely with the Bank of England and the Prudential Regulation Authority, who are considering the risks raised by the expansion of motor finance that fall within their regulatory remit.
We will publish an update on this work in Q1 2018.