Car dealers offering finance deals may be incentivised by sales targets and commission to encourage customers to take out unaffordable repayment plans with the highest interest rates, the Financial Conduct Authority (FCA) has warned.
The regulator has pledged to examine whether lenders in the rapidly-growing car finance sector “comply with current regulatory requirements”.
It added that lenders and brokers more widely are not doing enough to establish whether customers can pay back loans.
“A business model that is predicated on selling products to customers who can’t afford to repay them is not acceptable,” said Jonathan Davidson, the FCA’s head of retail at the Credit Summit. “We will take action against firms who run their businesses this way.”
Regulators and MPs, including Liberal Democrat Sir Vince Cable who spoke at the Credit Summit, have expressed concerns about consumer indebtedness nationally, which is close to returning to pre-crisis levels.
“After 2008, lenders became more conservative for obvious reasons, and so did borrowers and the share of personal debt to GDP fell to about 133 percent in 2015,” Cable told delegates at the Credit Summit. “It’s worth noting that even after that very substantial contraction, it is still at historically high levels. What’s happened in the last three years is that personal debt as a share of GDP has started to rise again, and it’s now at roughly 140 percent and the projections are it will reach crisis-level of 155 percent around 2022/23.”
Davidson told the Credit Summit that performing backward-looking credit checks alone was not sufficient, and that lenders should ask whether customers can afford repayment plans in the future if interest rates rise or if their job changes.
The FCA added is focusing on 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; and whether consumers’ engagement with firms, and the information they are given, allows them to make informed decisions.
Despite that, it found from the work done so far are that growth in motor finance has been strongest for consumers with better credit ratings, who are less likely to face repayment difficulties.
It also found arrears and default rates remain generally low, though they have increased moderately in recent years and that arrears and default rates are higher, and have risen more, among 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, the FCA said.
In some cases, customers are not being provided with key information in an accessible manner, including information provided on lenders’ and dealers’ websites, the FCA said. 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.