PCPs (personal contract purchases) and consumer car finance in general have come under attack in recent months as the national press responded to measures taken by the Financial Conduct Authority (FCA) and Bank of England.
Many dealers are convinced that headlines such as ‘Are cheap car loans the vehicle taking us to the next financial crash? (theguardian.com, June 10); ‘Reckless car loan salesmen exposed (The Daily Mail, July 3) or ‘Warning signs emerge in the UK car loan market’ (ft.com, July 9) are a sign of the national media looking in vain for a fire to go with its smoke.
Motor retailers are eager to defend the model that has fuelled record registrations growth in recent years.
Robert Forrester, the chief executive of Vertu Motors, believes the surge of negative publicity surrounding motor finance will “blow over”. He said the issue is the product of a media that is “largely confused and putting a raft of different issues together to make a story”.
Daksh Gupta, Marshall Motor Holdings’ chief executive, said: “The media are coming to their own conclusions on PCPs.”
However, despite industry analysts and trade bodies such as the Finance and Leasing Association (FLA) reiterating that consumers are at little risk because the credit is ‘asset-backed’ by the car itself, this does not mean there is zero risk to dealers or their finance providers.
Car finance ‘forgetting the lessons of the past’
Mark Carney, the governor of the Bank of England, expressed his concerns about motor finance when the Bank’s financial policy committee announced its intention to force banks to set aside an extra £11.4 billion by November 2018 to guard against potential shocks.
Carney said he feared the system had been “forgetting some of the lessons of the past”, with lenders starting to deliver finance to people with weaker credit records.
The Bank estimates “major UK banks’ total exposures to UK car finance to be around £20bn”.
However, the total amount of car loans being carried by consumers was £58bn last year, meaning most of it is being underwritten by automotive industry finance houses. And the figure is growing – consumer car debt in 2016 was more than double its 2012 level (£28bn).
PCP car finance is ‘driving unsecured credit’
Much of this growth is due to the rise of PCPs, which account for nine out of 10 private new car sales.
Frank Brown, from financial services consultancy Bovill, believes “motor finance sales show signs of overheating in the UK”.
He said: “PCPs, and the expanding motor finance sector, are driving the growth of unsecured credit.
“The overall unsecured credit market is increasing at the fastest rate in more than 11 years, rising by 11% in the year to November 2016, to £192.2bn. To put that figure in context, in September 2008 – at the time of the Lehman Brothers collapse – UK consumer credit debt peaked at £208bn.”
The FCA is investigating “potential conflicts of interest and irresponsible lending in the motor finance industry” and steps including restricting finance to a percentage of an applicant’s wage could be imposed.
Proposals to better manage risks of non-compliance in the pay and performance management of finance staff have also been published by the FCA as part of a consultation ending on October 4.
It said it found the combination of incentives, performance management and related controls posed a high or very high risk of customer detriment in 64% of the firms in its sample, whose primary business was not financial services, including retailers selling goods on finance.
Vauxhall and Suzuki have launched independent inquiries into franchisees’ finance sales after an undercover investigation by The Daily Mail revealed evidence of potential sales malpractice.
The newspaper sent reporters into 22 dealerships and encountered one sales executive who allegedly suggested manipulating answers in finance applications and another who proposed a £215-a-month PCP to a customer he believed to be unemployed.
Calls for transparency on car finance
John Penrose, Conservative MP for Weston, Worle and The Villages, told The Guardian: “Unless we have pitiless transparency in the car loans market, with industry standards to measure and report the risks in this fast-growing area, we won’t be able to spot problems in advance, or fix them before customers or banks get hurt.
“The finance industry has a great opportunity to show it can be responsible here, and that prevention is better than cure.”
Gupta told AM that his 100,000-registrations-a-year group rejected “between 8% and 10%” of finance applications. He said the default rate of its main finance provider was 0.7%.
At the start of July, Britain’s leading sub-prime car lender, The Car Finance Company, said it had written off £50 million in loans as customers fell behind on repayments – twice the level of a year earlier.
Gupta conceded that while franchised dealers are not involved in sub-prime lending “the effects of an incorrect read-across are obvious”.
However, when AM asked 20 of the UK’s leading motor finance providers – all members of the FLA – for their default rates, none was forthcoming.
The FLA’s head of motor finance, Adrian Dally, told AM that the default rates of its membership were “details that the FLA doesn’t hold”, adding: “It’s not as though there is no transparency.”
Dally told AM that lenders do provide data – to the FCA and the Bank of England’s Prudential Regulation Authority (PRA).
“It’s an open book, that’s mandatory, and the basis of what the FCA, Bank of England and PRA have been saying is from looking at that book.”
“The FCA and the Bank have seen all the data, including going back many years, and they have said many positive things about motor finance in recent weeks, about arrears in motor finance being significantly lower than other forms of consumer credit and also being low by historical standards.”
When AM contacted the FCA, it said it was “unable to provide this information” ahead of the publication of the details of its exploratory review.
So where is the risk in car finance?
While Peter Smyth, director at Swansway Garages, defended PCPs, stating that they were a tool that allowed dealers to “fulfil customers’ expectations”, he did express concern about potential conflicts of interest.
Smyth said the fact manufacturers attach some of the dealers’ margin to their PCP renewal rate “could promote unfair activity as far as the customer is concerned”, adding: “The renewals aspect is the bit that puts pressure on the dealer and we are asked to do that by the manufacturer or finance house.
“I think that, in some cases, is forcing customers further and further into a negative equity situation.”
Expressing what he saw as the market’s reliance on PCPs, Smyth warned: “If the market were to go back to selling hire purchase (HP) over 36 months with a 20% deposit, be in no doubt, the market would crash, but I don’t see that happening.”
Ken Savage, the chairman of Perrys Motor Sales, said it was clear where the biggest risk lies: “The point (Carney) was making was that PCPs could represent a risk to the banks, not consumers.”
While Carney said a 30% fall in used car prices would knock just 0.1 percentage points off the capital ratios of banks, the effects of such
a slump on manufacturer-owned finance houses are less clear.
Forrester suggested those who stood to lose out most in this event would be “those with contract hire companies, rental fleets and buy-back commitments”.
However, in the absence of a clean bill of health from the FCA or lenders publishing clear and transparent information on the stability of the finance market, it does seem unlikely that media organisations will lose interest in the story.