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Motor finance commission structures remain under FCA scrutiny

Car buyers’ ‘increasing arrears and default rates for customers with the lowest credit scores’ are among areas of consumer credit which remain a concern, the FCA has stated in its annual report.

The Financial Conduct Authority (FCA) once again highlighted the area of motor finance which remain worthy of scrutiny as it published its Annual Report and Accounts 2017/18 this week.

Reflecting on the key pieces of work undertaken by the organisation throughout 2017/18, the document said that the lenders it had reviewed appeared to be adequately managing the risk to their business from a potential fall in car prices.

However, the FCA said that it had found some areas of concern, such as increasing arrears and default rates for customers with the lowest credit scores and some poor practices in the way firms provide information to customers.

It added: “We also found that some commission structures could lead to higher motor finance costs if not properly managed by lenders and brokers.”

Speaking ahead of the authority’s Annual Public Meeting, which will be held on September 11 at the Queen Elizabeth II Conference Centre in London, its chairman Charles Randell said that the FCA had to act swiftly and decisively to tackle harm to consumers, particularly the most vulnerable. He added: “We have to make some difficult choices, learn from what works and what doesn’t - and be open about both.”

In its report on the motor finance sector, published back in March, the FCA said that “the largest FCA solo-regulated lenders are adequately managing the risk of a severe fall in used car prices, such that this would not materially affect their overall financial soundness”, some consumers remained vulnerable to difficulties in making repayments.

It noted that consumers in the lowest 30% of credit score range accounted for only 2% of outstanding motor finance lending in December 2014 and 3% in December 2016, adding that motor finance lending to consumers in the highest credit score range (lower credit risk) has grown more than lending to consumers in the lowest credit score range (higher credit risk).

Consumers in the highest 30% of credit score range accounted for 54% of outstanding motor finance lending in December 2016, up from 49% in December 2014, it said.

However, 2.4% of accounts in the FCA’s data had one or two missed payments and 0.4% of accounts had between three and five missed payments in the 12 months to December 2016.

By comparison, 1.6% of mortgage accounts were in arrears in Q4 of 2016. For personal loans and credit cards, around 0.3% and 2.2% of customers respectively are two or more payments behind.

The FCA said: “We are mindful that arrears and default rates have increased, in particular for higher credit risk (lower credit score) consumers.”

Alongside the challenges of rising levels of consumer credit, the FCA is working hard on its preparations for Brexit, according to its annual report.

Andrew Bailey, chief executive of the FCA, said: “While this Annual Report illustrates the wide range of our activities, there are three key areas that particularly define our work this year.

“The first is our work to prepare for the UK’s withdrawal from the EU.

“The second is regulatory change: this year we have applied legislation which will have profound implications for firms’ transparency, the way they treat consumers and in some cases even their business models. This has included MiFIDII, the second Payment Services Directive and preparing for the extension of the Senior Managers and Certification Regime to all firms.

“And the third area is ensuring that firms treat consumers fairly. Our work this year has sent a clear message to firms that, if they do not treat customers fairly, then we will take action.”

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