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Sector change is ‘inevitable’

Too many lenders are chasing too many consumers with rates delivering unacceptable margins, which could cause some consolidation in the financial services market as a whole, according to a review.

The Rocket Performance Group, an industry consultancy, has surveyed trends and believes changes in automotive financial services are inevitable.

Neil Ward, of The Rocket Group, said: “The financial services sector is coming under increased profit pressure and the current model must change.

“Our experience with a range of credit markets in the UK reveals that after years of growth, margins have been eroded to unsustainable levels. Some previously well-respected finance brokerages can no longer gain access to funders.”

Ward sees the pressure of rising bad debt levels and a fall in added-value income as catalysts for change. The unsecured finance market is particularly exposed but change in dealer finance and other secured markets is inevitable.

According to Ward, the closure of brokerages struggling to sustain access to funders – and/or sufficient income in some markets – is a clear sign the pressure is being felt.

“Margins in financial services are being affected by a double whammy of increased bad debt levels and a decline in added-value activities,” he said.

Ward believes the five interest rate hikes since August last year will impact bad debt levels as an over-indebted consumer market struggles to meet its finan-cial commitments.

“This will get worse later in the year as annual rate reviews and the end of fixed-rate schemes expose more people to the increased rates in the market,” he added.

At the same time, lenders have yet to replace the income previously gained from the sale of added-value income – notably credit protection insurance. This has been hit hard by the fall in added-value income in a regulated environment.

In the past credit insurance helped to ‘underwrite’ low headline rates but this income is in decline and “it is increasingly clear that the low headline rates and/or commission levels cannot be sustained”.

Ward added: “It is probably only a combination of fear of market share loss and a need to keep the factory wheels turning that is sustaining the low headline rates we still see in the personal finance market. But the over-supply sustaining competitive rates must surely change.”

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