FCA launches review into motor financing

calculator, £20 and £10 notes with a black pen with the lid off Print publication


The Financial Conduct Authority (FCA) has launched a review into the UK motor finance industry. In its annual business plan for 2017/2018 published on 18 April 2017, the FCA stated that it was concerned that “there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry.”

The FCA has stated that it will conduct an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance.

The review follows concerns from the Bank of England regarding the levels of personal debt accumulated by UK consumers in recent years. The review is expected to last for over a year and to complete in 2018 or 2019. We would expect the FCA to be in contact with motor finance companies shortly as part of its information gathering process.

The Finance and Leasing Association (FLA) has said that it will work closely with the FCA on the review. In 2016, FLA members provided £41 billion of new finance to help households and businesses purchase cars and financed over 86% of all private new car registrations in the UK.

The FCA has stated that, following the review, it will assess whether and how to intervene in the market. There are a number of options available to the FCA such as launching its own further market study, asking the Competition and Markets Authority to conduct an in-depth “Market Investigation”, or taking other enforcement action against individual firms.

A key area for the review is likely to be the growth of Personal Contract Purchases (PCPs). These are fixed period contracts which keep repayments low by deducting the predicted future value of the vehicle at the end of the term.

The review could potentially lead to measures such as: enhanced affordability tests for motor finance and controls on lending to vulnerable customers; alterations to loan redemption terms or caps on default and other charges; a ban on certain types of loans; requiring disclosure of any commission received by suppliers within the chain; enhanced transparency of loan terms; and measures to encourage shopping around by customers. Measures introduced in comparable reviews have included capping loan charges (i.e. capping the profitability of products) and imposing restrictions on the way in which products are sold.

The Competition and Regulatory & Compliance teams at Walker Morris have extensive experience advising across the financial services sector including on the recent market investigation into payday lending and review of PPI. We represent clients before the CMA and the FCA and we are also familiar with advising businesses across the motor sector.

If you would like to discuss this review and what it might mean for your organisation, or if you receive any direct communication from the FCA and wish to understand the implications of your proposed response, please contact Trudy Feaster-Gee or Jeanette Burgess in the first instance.