2017 has seen the motor finance industry face a much higher level of national scrutiny than usual. Motor Finance spoke to a number of key figures to assess the media’s position and determine the industry’s response

Since the release of the Financial Conduct Authority’s (FCA) business plan for the year, mentioning an exploratory review of motor finance, the sector has seen an explosion of national interest.

For an industry that is traditionally introducer-based, finding itself on the front pages of any number of newspapers, on mainstream websites and in the general zeitgeist of the public has been in many ways an unusual and not entirely pleasant experience.

While the old adage might be that there is no such thing as bad publicity, a front-cover headline ‘Reckless Car Loan Salesmen Exposed’ puts that theory to the test. This was just one example of a paper running such a headline, but there have been others.

Some of the criticism included issues around PCP – whether it is a suitable product, or if is leading to the next recession; supposed issues with underwriting in the subprime space and linking UK motor finance subprime lending with the US subprime mortgage market from 2007.

Other, more isolated ‘problems’ brought up, include products such as immobilisers or, as they are sometimes referred to, ‘kill switches’. Subprime lender The Car Finance Company, which employs immobilisers, was held up as an example of all of the above when it found itself in financial difficulties.

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Much of this criticism has been muddled, with writers not delineating between the problems they were talking about. Few articles actually included interviews with lenders themselves.

Not unreasonably, a number of lenders have reached out and spoken to Motor Finance in order to voice their frustration with some of the recent coverage. Those that spoke generally wanted to do so anonymously.

One lender described the level of journalism displayed so far as “lazy” as a result of various papers mixing up subprime and PCP repeatedly. Noting how few articles actually contained conversations with lenders, the lender noted: “There is a lot of noise without a lot of insight.”

A typical example of this surrounds the use of PCP in subprime. Although few papers have explicitly mentioned PCP being offered in the subprime space, the two issues are often spoken about as being part of the same problem. This is despite PCP being virtually non-existent in the subprime space.

Explaining why this is the case, one subprime lender explained there are two reasons for this. From a customer’s point of view, because you are applying interest to the whole principle amount, including the balloon payments, and interest rates tend to be higher, monthly payments will rarely be reduced compared to HP.

From the lender’s perspective, with default rates higher, a product which holds back a large chunk of the payment until the final balloon payment and adds residual value risks to an already more-risky book makes the product less appealing.

Roger Gewolb, serial financial entrepreneur and founder of the Campaign for Fair Finance and FairMoney.com, tells Motor Finance: “PCP is mainly being practiced by the likes of Ford and Toyota, and lenders with default ratios under 2%. They are not going to underwrite a PCP deal for someone who does not have really excellent credit.”

PCP issues

The Daily Mail raised some issues when it conducted a mystery shopping exercise, in which it found dealers who suggested attractive finance offers for new cars to a journalist posing variously as a part-time employee, a temporary worker, and even on one occasion as someone unemployed.

The problem was, as Adrian Dally, head of motor finance at the Finance & Leasing Association (FLA), notes: “The Mail mystery shoppers did not go through the application stage, and had they done so they would have gone through a very rigorous and responsible application process.

“At the end of the day, none of these people became applicants. It is hard to draw conclusions from that type of survey.

“There are strong regulatory rules about how a lender relates to its intermediaries, in terms of oversight and appropriate allocation of facilities.”

The simple fact is that lenders who wish to remain in business will generally only lend to people they believe will be both willing and able to pay them back, a point mentioned by everyone Motor Finance spoke to for this feature.

There is also a question over the extent to which a lender is responsible for the actions of dealer partners.

As Melanie Chell, partner at Shoosmiths, notes: “The Consumer Credit Act holds a finance house (FH) responsible for representations made by the dealer at the point of sale in certain circumstances, and whilst an FH has a right to claim an indemnity from a dealer it must bear in mind a primary liability for issues at the point of sale.”

That said, both Chell, and fellow Shoosmiths partner Stephen Dawson note that while rogue salesmen are a relevant consideration – not that the dealers in the Mail article should necessarily be considered as such – they are in increasingly reduced numbers.
Dawson suggests that this is largely thanks to The Consumer Credit Sourcebook (CONC) 2.2.1, which says a firm must ensure that its employees and agents comply with CONC, and take reasonable steps to ensure that other persons acting on its behalf comply with CONC.

He adds: “This rule has undoubtedly resulted in reputable lenders taking a much greater interest in the activities of dealers. At the same time, volume sales are no longer directly rewarded with commissions and incentives in the same way that they were. For this reason, I do think that the rules are very significantly improved from where we were even three or four years ago.”

The next crash?

Where things get tricky to interpret is whether newspapers are viewing the residual risks that prime lenders are taking on as a cause for the next recession, or whether it is bad lending practises in the subprime space.

Weakening diesel values have added to the chorus of suggestions that companies have left themselves over exposed to residual values.

However those in the industry are relatively calm about the future. Gewolb, for example, acknowledges that some lenders may take a hit on residual values from diesel cars, but says the damage done is being blown out of proportion. Instead, he says a number of papers have misinterpreted the BoE’s message.

“I do not think the FCA, the BoE and Mark Carney are saying the same things these journalists are saying at all,” Gewolb notes.

“If somebody wanted to invite me to a public forum, I would say that I think they would be the first ones to say there is not going to be a financial crash because of PCP.”

Gewolb is not alone in his view. Dally says: “What [the PRA] said was that if residual values go down by 30% beyond where they already are, and if every consumer of a PCP hands their car back, and both of those are historically unprecedented, then using the Bank of England’s stress test as a model, the effect of that would be 0.1% of banks’ capital ratios.

“As Mark Carney said, that would be a pretty insignificant effect on the financial system. Therefore he was, in his own words, sanguine about motor finance, and that is even after that historically unprecedented stress test.”

It is a similar story when it comes to the subprime space, which some have suggested could cause a collapse similar to that experienced in the US subprime mortgage market in the US in 2007.

However, as a UK subprime lender explains, the US crash was caused by people not being aware of who they were lending to, and then these loans being securitised in packages to people who were not aware of what those packages contained.

In contrast, subprime lenders in the UK are more aware of their customers – with some still manually underwriting every deal – while securitisations involve a much more rigorous due diligence before going ahead.


Overall, the industry is saying one thing and the press is saying something else.

For Gewolb, many lenders are burying their heads in the sand as they try to figure out how to respond. This is damaging the industry, he says, pointing out one of his contacts who was looking to go into commercial lending, but stepped away as a result of the bad coverage.

Both motor and finance sales have faltered since the negative press began, although it is hard to tell how much that is to do with what people are reading, the effect of the VED changes that came into force earlier this year, and a market already arguably reaching its limits given the population size.

Dally concludes: “The message I would like to get across to the industry is the positives of what has been said.

“What is the reality of what has been said by the people that really matter?

“What has the FCA said? It is an exploratory piece of work to enable it to understand the market. That is the truth. There is nothing more to it than that.

“The Bank of England has said it is sanguine about the market. These are very positive things said by the people that regulate the sector and have been under the metaphorical bonnet looking at what is going on.” <