The City watchdog has turned to American regulators and bankers for advice as part of its probe into the controversial car financing industry to assess whether there has been a “structural” shift in the way Britons buy vehicles.
An explosion in a new type of car loans called personal contract purchases (PCPs) has helped to fuel the recent rapid growth in consumer credit, a lending boom that has drawn scrutiny from the Bank of England and the Financial Conduct Authority (FCA) amid concerns it could be a bubble.
Earlier this week, the Bank estimated that car finance has increased at an average annual rate of 20pc since 2012, equating to a £30bn rise in total stock. Some City analysts have speculated that if the valuations underpinning car loans are wrong, it would set the industry up for a crash.
The FCA revealed earlier this year that it was assessing the motor finance industry because it was concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending.
The advice the City watchdog had received was that it should view car loans through the lens of secured borrowing, which is look at the value of the security and the terms of the borrowing.
PCP agreements are similar to car financing that is popular in the US.
The deals require smaller monthly payments than typical hire purchase agreements, making PCPs attractive to British consumers.
Once the term of the PCP loan is up, the driver can either make a so-called “balloon payment” that was agreed at the start of the deal to own the car outright, or return the vehicle.
The balloon payments are calculated based on an estimate of the car’s future value on the second-hand market when the PCP agreement expires.
The Bank has forecast that big British lenders’ exposure to motor finance stands at about £20bn. It estimated that if all PCP customers handed back their vehicles and the used value of car was actually 30pc lower than had been anticipated, there would be market-wide losses of between 7pc and 10pc.
Mr Bailey was speaking at the British Bankers’ Association’s retail banking conference in London, where he also cautioned that the FCA was looking at how some banks are pulling back from current accounts because they “are regarded as more expensive in terms of operational costs”. He added: “This is, of course, consistent with relatively easier funding conditions.”
Norwich & Peterborough Building Society revealed in January that it was closing all of its current accounts by the end of August.
The FCA chief also said the watchdog was conscious that it did not take actions that would encourage illegal lending by cutting off the supply credit to those who are less able to secure it. Last year it launched a review into whether the cap on interest on payday loans, introduced at the start of 2015, was pushing borrowers into the arms of loan sharks.
Written by Ben Martin – The Telegraph