Jonathan Davidson, executive director of supervision – retail and authorisations, at the FCA has said the growth of PCP was evidence of innovation and business model diversity in a speech at Credit Summit 2018.

In his speech, Davidson noted: “The growth of PCP contracts in the motor finance market is a good example of an innovation that has had a significant impact. These contracts don’t require the customer to repay the whole cost of the car over the life of the loan. They also provide flexibility at the end of the agreement by offering the option to return the car, buy it or use any equity built up in the purchase of a new one.

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“So financing of car ownership has become more affordable, allowing more consumers to have more expensive cars. Indeed, the number of point-of-sale consumer motor finance agreements for new and used cars has nearly doubled from around 1.2m in 2008 to around 2.3m in 2017.”

Overall he said this type of innovation painted a ‘really attractive picture’ of the industry.

What is more, Davidson referenced the review update the FCA published last week, noting that most of the growth in motor finance had come from lower credit risk consumers.

Warnings

The speech was not entirely positive, and he added: “However, we are also seeing that arrears and default rates, while still low, are on the rise, particularly for higher credit risk consumers. This is despite favourable credit and economic conditions, which begs the question: if we’re seeing this pattern now, what would happen if there was an economic downturn?”

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He also pointed out that the financial situation for some remained precarious, in particular the younger generations facing large student loan repayments, higher costs to get on the housing ladder, and generally low savings levels. All this could be exacerbated by rises to interest rates.

With this in mind, Davidson emphasised the importance of affordability checking in addition to credit checking.

Although he noted that the FCA did not want to be overly prescriptive on consumer credit checks, he said: “Our guidance to firms highlights areas for you to consider – including the future financial commitments of the customers, and the future changes in their circumstances.”

To this he added: “It seems like common sense to ask and answer questions like – what might happen if rates rise?  What might happen if the cost of living rises?  Are there indicators that a customers’ circumstances – for example their job situation – could change?

However, I fear that common sense might not be that common.  We have seen a lot of firms not doing affordability checks or just doing credit checks.