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Creditfix LB 03-2017

FCA Concerned Over UK Subprime Vehicle Finance

The FCA have voiced further concerns over the growth of UK vehicle finance deals, saying that default rates for high-risk borrowers are growing.

A recent report by the Financial Conduct Authority (FCA) states that arrears and defaults on loan repayments ‘have increased somewhat, particularly for higher credit risk consumers.’

The watchdog also feels that high interest rate loans have been allowed to borrowers with poor credit ratings to allow the brokers to profit from generous commissions.

The FCA enquiry into the car finance industry, currently worth around £40 billion, was announced in April 2017 with full results due in September this year. However, the FCA has published an interim update.

Measures have included sending out mystery shoppers to assess the customer journey process, ensuring that lenders are complying with regulations and issuing consumers with enough information on loans.

Whilst the findings have been mainly positive, the report also warns that changing economic conditions could present potential problems.

FCA’s executive director of supervision, Jonathan Davidson, said: ‘The good news is that most of the growth has been to lower credit-risk consumers. However, we are also seeing that arrears and default rates, while still low, are on the rise, particularly for higher credit-risk consumers.’

Davidson continued: ‘This is despite favourable credit and economic conditions, which begs the question: if we’re seeing this pattern now, what would happen if there was an economic downturn?’

The number of vehicle finance agreements has almost doubled over the last decade since the global financial crisis, from 1.2 million in 2008, making up 59 per cent of new car sales, to 2.3 million in 2017, representing 88 per cent of all new car sales.

The majority of the growth has been from personal contract purchase (PCP) agreements, which made up just 34 per cent in 2008, up to 66 per cent in 2017.

The FCA have stated that while they have found lenders to be ‘adequately managing’ risks from a possible fall in used car values, they should ‘consider changes in the market, which could affect their assumptions of residual car values and their financial soundness’.

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