FCA announcement on motor finance
31 July 2017
Today the FCA announced the key questions that underpin the ongoing work on motor finance.
The FCA’s Business Plan 2017/18 highlights concerns with lack of transparency, potential conflicts of interest, and irresponsible lending in the motor finance industry.
The FCA stated its intention to “conduct an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance.”
Concerns and key questions relating to FCA’s current work
Based on the regulator’s work to-date, the following are believed to have the potential for consumer harm:
- Personal Contract Purchase (PCPs). The PRA argues “a PCP agreement creates an explicit risk exposure to a vehicle’s Guaranteed Future Value (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.”
- Terminology. The jargon used in the motor finance market is not universal and may be confusing. (Not least as FCA refers to GFV when previously it and the OFT insisted this was an optional final payment!)
- Price/commission caps. Lenders may apply price/commission caps to their broker/dealer partners. For used car sales, there may be a greater risk that the finance aspect of a car purchase is used to generate a margin on the sale.
The FCA identified the following key questions, which shape the ongoing work:
- 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?
The FCA is to publish an update on this work in Q1 2018.
The FCA is working alongside the Bank of England and the PRA, who are considering the risks raised by the expansion of motor finance that fall within their regulatory remit.
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