It was reported in the press that earlier
this month, leading figures from three major religions – a priest,
a rabbi and an imam – walked through the City and handed over
copies of their respective holy books to Sir Philip Hampton,
chairman of the Royal Bank of Scotland.
The symbolic march from
Bevis Marks synagogue to the HQ of RBS represents the three
religions’ opposition to the practice of usury – of charging
unreasonably high rates of interest on loans.
Go deeper with GlobalData
London Citizens, the
umbrella group which organised the protest, would like to see
interest rates for personal borrowers capped at 8 percent. But
could motor finance companies cater to all their customers if this
cap were to be introduced?
First, it is clear that
the principle of ‘treating customers fairly’ (TCF) must be adhered
to at all times.
Most motor finance
providers have taken this exhortation to heart, embedding TCF
guidelines and rules at the heart of their operations; charging
excessive rates of interest on motor loans definitely breaches the
spirit and the practice of TCF. But what constitutes a “reasonable”
rate of return is another question entirely.
Consider an application
from a subprime customer – perhaps someone who recently lost his
job, and fell behind on some bills, leading to an impaired
rating.
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By GlobalDataOur hypothetical customer
has found a new job – but one that he needs to travel to by car
(not an unlikely scenario given the parlous state of public
transport in much of the UK). He is applying for a loan for a
modest used vehicle. Surely a capped interest rate of 8 percent is
reasonable?
But the picture is not so
simple. Perhaps the industry the customer works in is particularly
vulnerable to the recession; perhaps there are other causes for
potential worry on his credit record. This is not to say he should
be turned down, but that, following a risk assessment, a
responsible lender will agree a loan and set a rate, which will
most likely exceed the 8 percent cap requested by the London
Citizens.
Were the cap in place, no
regulated lender would be willing to lend to the non-prime or
subprime market, for the simple reason that running a collections
department is an expensive business, and an 8 percent return would
not cover the costs of lending in this market segment.
So where would our
hypothetical customer turn, if all legitimate lenders turned him
down? Perhaps to loan sharks, who are not bound by caps on rates,
whose borrowers enjoy little legal protection, and whose
collections practices are somewhat cruder than is standard in the
motor lending industry.
A subprime motor lender
once told me that he often received thank-you letters from
customers, grateful that his company would lend to them at rates
four or five times higher than the proposed cap.
As getting by without
credit is, for many people, not an option, a functioning and
transparent credit industry serving the lower end of the ratings
scale is not just necessary, but also desirable.
At a time when welcome
signs of life are slowly returning to the subprime motor finance
market, the last thing the sector needs is public outcry – genuine
or otherwise – about supposedly “too high” interest rates,
especially when the alternative is far, far worse.
