If yesterday’s heavy rain showers weren’t enough to dampen spirits on the bank holiday weekend for the leaders of the UK consumer motor finance industry, this morning’s front page story in The Times headlined “Fears for car market amid loans mis-selling” may have had the same effect.
In the first part of a three-day series of articles on the market, The Times reports ‘concerns’ that not all buyers understand PCPs and may also not know who their finance agreement is with.
Its leading article refers to tens of billions of pounds being lent and borrowed without enough due diligence by either the lenders or borrowers.
Meanwhile the Sun today asks the question: “Is Britain’s car finance market heading for a mis-selling scandal?”. It notes that if PCP loans have been mis-sold, dealers could be liable for millions of pounds in compensation.
Do the stories have substance or is this ‘fake news’? Here is Asset Finance International’s (AFI) review of the key claims and the facts behind them.
Claim: “The majority of customers have no idea who their financing contract is with”
AFI fact check: Every customer is advised, in writing, who their finance agreement is with. It may not be clear who the contract will be when the customer discusses finance with the car dealer, as the dealer may be acting as an introducer to a specialist broker or to one of a panel of lenders. The dealer should explain this to the customer. Most larger dealers with in-house compliance expertise or external advisers have this sorted. Regulatory disclosures have improved greatly over the past two years but some smaller dealers may still need to improve the notices on their websites.
Claim: “PCP customers are being badly advised, even misled, on interest rates and whether they will ever actually own their cars”
AFI fact check: Most car lenders have clear explanations of PCP products on their websites. Dealer staff are trained to explain the products and many take the Finance and Leasing Association's (FLA) demanding Specialist Automotive Finance exams. However strong the training and procedures, it’s difficult to prove that the right explanations were provided in the dealership to every customer at the right time. Expect to see more use of IT in the dealership, including self-service mobile devices and terminals, to help ensure there’s always irrefutable evidence to confirm the right advice was given.
Adrian Dally, head of motor finance at the FLA, was quoted in the Times as saying that dealers and other automotive lenders are on top of the regulatory issues and there are few signs of mis-selling of vehicle loans. “The asset is known, the consumer is known and it is all very transparent,” Mr Dally told the Times.
Claim: “Risk of a new credit crunch if wholesale lenders, overexposed to bad car loans, lose faith in the market”
AFI fact check: PCP programmes are funded by the captives, who may then raise finance by selling asset-backed securities that are underwritten by their manufacturer parents. Even if bad debt was to increase significantly - and there are no signs of that - the manufacturer backing should avoid risks to investors. Some banks are exposed to bad debt more directly through loans to car finance companies that specialise in the used car market, particularly in the near-prime or sub-prime market. The size of the exposures are not significant and tighter capital requirements regulations are already leading to banks stepping back from this type of lending to non-bank finance companies. There’s no shortage of non-bank investors stepping in to take their place.
Claim: “Motor finance providers are not undertaking due diligence on the brokers introducing deals to them”.
AFI fact check: It’s a fundamental part of the FCA consumer credit regime that introducers must have their own FCA authorisation (or be ‘Appointed Representatives’ of an authorised firm). All the major lenders check and regularly re-check their introducer on the FCA Register, with their procedures being regularly checked by internal audit teams. It’s theoretically possible that some smaller lenders aren’t as diligent, but there’s no evidence of any such problems and the risks involved act as a significant deterrent to cutting corners.
Claim: Car dealers are encouraging customers to spend over half their monthly disposable income on car contracts.
AFI Fact check: Car dealers are required to ‘have regard to’ affordability but it is the lender’s job to carry out a formal assessment. A significant minority of loan applications (quite possibly including those in the press reports) are rejected. Affordability is often assessed using credit checks on the principle that if other bills are paid on time then the customer can be treated as financially capable and responsible. New IT for car dealers, including basic affordability considerations, should help prevent this type of claim.
Today’s reports follow the announcement by the Financial Conduct Authority, reported by Asset Finance International on 18 April, that the regulator will carry out an exploratory enquiry into motor finance. The FCA said it was concerned there might be conflicts of interest and irresponsible lending in the sector.
Commenting on the FCA’s planned review, Sue Robinson, director of the National Franchised Dealers Association, said: "Franchised dealers are highly regulated under the FCA and provide consumer finance under the rules set by the regulator. NFDA will liaise with the FCA on the exploratory enquiry to ensure that the outcome is satisfactory for both consumers and dealers.”
It is possible that the FCA may refer the issue to the Competition and Markets Authority for a wider review of how new cars are sold, including the use of subsidised finance.