It is safe to say that the regulatory spotlight on motor finance is intensifying. The rapid growth in PCP in the past few years has resulted in the Financial Conduct Authority (FCA) investigating the potential for consumer harm. Matthew Drage, head of external engagement at Huntswood, writes.
The big question the FCA is seeking to answer is whether lenders are adequately managing risks or not, especially when dealing with vulnerable customers, and challenging whether affordability assessments remain rigorous enough in a changing economic climate.
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The preliminary results from the FCA’s investigation published in 2018 painted a mixed picture. It is good to see that, at least, arrears and default rates remain generally low, although they have increased moderately in recent years.
However, the FCA has cited some areas where it feels the sector needs to improve, including:
- Customers not being provided with key information in an accessible manner, especially the depth and accessibility of information on lenders’ websites;
- If firms are sufficiently assessing whether customers can afford to buy the car offered, especially where the customer has a low credit score, and
- Whether lenders are adequately managing business risk from a potential fall in car prices.
Customer vulnerability is an area of increasing focus across many regulated industries. Regulators are pushing to ensure that companies address this as a core consideration, and are now actively discussing the approaches taken as part of their normal supervisory activity.
‘Vulnerability’ has a broad definition, with the FCA stating that this can be “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”. With the level of regulatory scrutiny on this issue increasing, lenders must make it a priority to ensure that customers in vulnerable circumstances are dealt with appropriately and sensitively.
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By GlobalDataIn this respect, staff members in contact with vulnerable customers need be specifically trained to ensure an understanding of how to identify and support these groups. This is especially important when chasing outstanding payments. Developing and embedding a robust vulnerable customer framework is one way in which firms can ensure they are compliant.
Affordability is also coming into focus – particularly the ability for a consumer to settle the final balloon payment on a PCP if they intend to keep the vehicle. In addition, monthly payments on a vehicle are only part of the commitment to operating and using the vehicle: a finance agreement will state that the vehicle must be comprehensively insured and maintained – costs that vary dramatically from one vehicle to another.
Shedding further light on the issue, Alan Henson from automotive data specialist KeeResources said: “We provide comprehensive data to reflect the whole-life cost of a vehicle – both new and used. These whole-life costs can vary significantly, even though the monthly finance payment for the vehicle itself may be similar.
“With the growth in electric and hybrid vehicles, calculating running costs is essential. Any lender should consider such factors as part of their consideration and affordability criteria.”
Speculation continues to grow as to whether or not the FCA will uncover a significant number of cases in which customers were, it believes, mis-sold PCP finance deals. Graham Hill, former director of the National Association of Commercial Finance Brokers, has previously expressed concerns over legal firms and claims management companies (CMCs) looking for additional revenue streams following the time-barring of payment-protection insurance complaints in August 2019.
If this proves to be true, lenders are likely to expect a rise in the number of complaints they have to deal with, putting strain on existing operational resources. If complaints are not found to have been dealt with properly, customers could opt to escalate their complaint to the Financial Ombudsman Service, which brings its own financial penalties and reputational damage.
Will the findings of the FCA’s investigation into the motor finance be the starting gun CMCs are waiting for? Until it is released, it is difficult to tell. In the meantime, lenders should be putting plans in place to ensure they are able to cope with whatever comes their way later this year – watch this space.
by Matthew Drage
