Following the recent news that the 2017/2018 FCA business plan includes an exploratory review into the potential mis-selling of car finance, there have been calls for more stringent affordability checks to be enforced by the regulator.
It has been reported by various publications that figures show it’s households with ‘stressed’ incomes that are the driving force behind the record-high for vehicles purchased using car finance deals if you excuse the pun.
Following the economic downturn which saw sub-prime mortgages play a ruinous role, more stringent affordability checks were introduced for potential borrowers. In a bid to avoid the lending trap of self-certified, interest only products, lenders began to ‘stress-test’ applicants to see if they could afford repayments should the rates reach 7%.
Day to day finances also came under severe scrutiny, with borrowers required to reveal how much they earn, the amount of any personal debt, and how much they spend on monthly outgoings, from food and utilities to recreation.
Depending on what the FCA finds in its review, this extent of stringency could be applied to car finance products too. They could also take into consideration personal family circumstances and other controversial scenarios. For instance, a family with two pre-school children could be eligible to borrow less compared to a family with children of school age – because lenders will take into consideration the higher childcare costs that are faced.
There is another view, however; since 2014, when the FCA took over consumer credit regulation, we have seen increased tightening on the requirements for assessing affordability, along with the rules for handling arrears. It has been argued by finance experts that the problems with the lending policies do not necessarily require tougher checks, they require the existing regulations to be enforced.
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Part of the aim of the FCA investigation is to uncover how the policies are being sold, who they are being sold too and whether sales staff are carrying out sufficient checks, or avoiding them to ensure they meet their monthly targets.
We are currently witnessing a misalignment in the sales targets set by dealerships, and their FCA accreditation that means they are obliged to sell finance products in a transparent and impartial manner, and in a non-advisory capacity. However, in reality, PCP products are not only highly targeted, but highly incentivised too; with sales staff measured on the amount of money that customers finance- with customers being encouraged to lay down smaller deposits.
The rate of interest offered by dealerships has also come under fire, with the average rate of interest reported to be 9.4%. Of course, with many personal finance products, the rate of interest is based on previous credit and lending history and the level of risk to the lender, but dealerships may find themselves having to justify the interest they are charging.
This can be seen in the mortgage industry where banks are left to take their own view on interest, so long as it can be justified. The crackdown on current affordability checks or introduction of new checks could potentially see more applicants being turned down, along with increased costs to dealers as the crackdown could increase the amount of time the checks take, and the depreciating assets that they are unable to sell.
It is speculated that the FCA that will be referring the investigation to the Competition and Marketing Authority, so that a wider review of the car sales industry can be undertaken; this would be a lengthy process, with Brexit adding to the complication. In that time, we can only hope that a sudden downturn doesn’t occur, as many drivers will be unable to meet monthly payments and dealerships will once again, be left with rapidly depreciating assets. The trend of transparency has rippled through many industries; it is now time for the car sales sector to acknowledge and embrace this.
Andrew Wayland is head of marketing at EveryDay Loans