The UK is becoming a more regulated environment for consumer credit
The FCA has been active in bringing in fee caps for consumer credit in different sectors, but what could this mean for motor finance?
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From the 12 November this year, the FCA will introduce regulation in the Buy Now Pay Later (BNPL) market.
With a view of saving consumers around £40m-£60m per year, the FCA is targeting firms who have been charging backdated interest on money that has been repaid by the customer during the BNPL period.
Firms will be required to provide better information on the BNPL offers, reflecting both the risks and benefits of the product in a more balanced manner. In addition, firms will be required to prompt consumers when the offer period is about to end – giving them time to repay the credit before incurred interest.
Current BNPL schemes typically last up to 12 months, during which consumers do not have to make payments and are not charged interest. However if the customer fails to repay the full amount within this period, then interest will be charged from the date of purchase. Consumers who repay part but not the entire amount owed are still charged backdated interest on that part.
Rent to own
On 1 April this year, the Financial Conduct Authority (FCA) introduced a price cap intended to protect vulnerable customers in the UK in the rent-to-own (RTO) sector.
The price cap comes from FCA concerns over the excessive pricing of rent-to-own products, potentially exploited against people who may not fully understand the payment structure.
In the policy statement, the FCA confirmed details such as setting a total credit cap of 100%, introducing a requirement on firms to benchmark base prices against the prices charged by three mainstream retailers, and preventing firms increasing their prices for insurance premiums to recoup lost revenue from the price cap.
A 100% price cap would mean that consumers do not pay credit costs (total interest payable) that are higher than the price of the product, including delivery and installation.
So what does this mean for motor finance?
In March, Jonathan Davidson, executive director of supervision – retail and authorisations at the FCA, reaffirmed the regulator’s focus on affordability, business models and culture in the consumer credit sector.
Davidson said that growth in the sector has slowed, increasing 6.5% over the last 12 months according to the latest figures from the Bank of England. The sector, however, remains “by far and away” the largest sector in terms of the number of firms the FCA supervises, with approximately 40,000 authorised businesses.
He also noted the uncertain economic environment facing UK businesses, but reassures firms that “while Brexit adds to this uncertainty, the one thing that is certain is that the day after Brexit will not change the way we regulate your companies”.
The FCA focus on business models formed the basis of its investigation into the motor finance industry, according to Davidson. He said the investigation “raised serious concerns about the way in which lenders in the motor finance market are choosing to reward car retailers and other credit brokers for business”, despite apparent efforts from the Finance & Leasing Association (FLA) and its members to move the industry away from questionable business models.
The relending and the guarantor loans markets have attracted the regulator’s attention with regards to affordability. The FCA has observed high levels of relending in all areas of high cost credit, while a dramatic increase has been seen in the use of guarantor loans by consumers.
“We will be doing further work to understand both the motivation for, and the impact of, relending on both consumers and firms,” said Davidson. “These levels of relending raise questions about the adequacy of creditworthiness assessments and its appropriateness for the consumer.”
Balances on guarantor loans, according to the speech, are fast approaching £1bn – more than double the figure recorded in 2016. Davidson indicated concerns surrounding affordability and “evidence that guarantors may not understand how likely it is that they will be called upon to make a payment”.
The speech also stresses the importance of a ‘healthy culture’ at businesses, encouraging companies to take note of the Senior Managers and Certification Regime (SM&CR). “Culture is a root cause driver of behaviours and outcomes in firms. Culture eats strategy for breakfast,” Davidson said.
Consumer fee protections