The Financial Conduct Authority (FCA) recently announced a review of the motor finance market to establish whether firms should perform tougher checks on drivers before letting them sign up for deals.
This has led to recent widespread concern that the mis-selling of car loans could be the next PPI scandal. But is this concern misplaced?
Given more speculation (still) for increased regulation to the UK energy sector, Russell Kelsall (Partner) and Alanna Tregear (Solicitor) from TLT LLP, highlight the current regulatory requirements, the rising concerns of mis-selling in the car finance market and the kind of FCA considerations the motor finance market could expect in their highly anticipated review in Thomson Reuters.
In lending terms, motor finance is second only to the mortgage market. Recent statistics from the Finance and Leasing Association (FLA) show FLA members provided £41 billion of new finance and financed over 86% of all private new car registrations in the UK.
The mortgage and lending markets are, however, regulated very differently. To give a comparison:
There is, however, yet to be any tangible evidence that the motor finance market is not working or that the regulation surrounding lenders is not sufficient. There is also yet to be any evidence of systemic mis-selling by motor finance dealers. The market, in fact, continues to grow and grow as the demand for vehicles, and the additional benefits that come with them, continues to do so.
Speculation first started in June 2016, as the PPI claims began to dry up, of whether claims management companies would look at personal contract plan finance agreements (or PCP) as the next mis-selling scandal. There is now considerable talk on whether promises or claims made by dealers to borrowers will be true. In particular, claims management companies see a potential avenue for claims where dealers are informing the borrower that they will have a deposit to finance a new vehicle (being the difference between the vehicle's valuation and the outstanding balance at the end of the agreement). However, such claims are likely to require a considerable amount of work for potentially little, or no, reward.
There has been increasing concerns from the Bank of England regarding the levels of personal debt accumulated by UK consumers in recent years. Most recently, the FCA (in its Business Plan 2017/18) said they were "concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry". No further information was provided.
The FCA said 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". This review is expected to last over a year and complete in 2018 or 2019. We expect the FCA will contact dealers, brokers and motor finance providers to ensure information is gathered on a formal and informal basis, but more regularly. The FCA has said it will, following the review, assess whether and how to intervene in the market. Even if the FCA finds a well-functioning market, it will normally propose changes to the current regulatory requirements (see, for example, the FCA's recent work in the credit card market).
Consumers entering into a motor finance agreement already are entitled to feel that they already receive a considerable amount of paper before entering into an agreement. This includes a status disclosure document for the dealer or broker (explaining, for example, the dealer/broker's role, their remuneration (including commissions), what will happen to the borrower's data and the complaint process), information on 'add ons' (like warranty, etc) and a lender's adequate explanation, pre-contractual information document (or a SECCI) and agreement. This significant amount of paperwork is just to comply with the legal requirements and leaves lenders, and dealers, with little scope to make the process more interactive. However, should they expect more, and for good reason? Perhaps not in volume, but in the clear and concise requirements currently implemented on insurance policy providers.
The FCA may see this review, combined with Brexit, as an opportunity to simplify the sales process and ensure consumers are given more accessible information. For example, the strict form of the SECCI could be removed after Brexit happens allowing lenders to communicate in a more interactive way.
The FCA may also look again creditworthiness and affordability. To date, the FCA has been clear it is very much a matter for each lender to introduce compliant process on creditworthiness and affordability. This contrasts significantly with the position for a mortgage lender who, following the introduction of the Mortgage Market Review in April 2014, have to abide by much stricter and more prescriptive conditions before agreeing to lend money. But there are a number of arguments why the motor finance market is different. For example, the borrower is tied into an agreement for a shorter period of time, the rate of interest is normally fixed, and (for PCP) the vehicle's value is guaranteed at the end.
We could also expect the FCA to consider changing the provisions in the Consumer Credit Sourcebook (called CONC) to force commission disclosure (rather than just telling the borrower about commissions), to have more prescriptive on its rules on vulnerable consumers or to reconsider fees charges for defaults or early repayment.
But is there any real need for change in the motor finance market? And are we likely to see a mis-selling scandal in the short-term? The issue is probably best summarised by Adrian Dally, head of motor finance at the FLA (which represents motor finance providers). He recently said: “The motor finance industry is committed to responsible lending and to high standards of customer service. We will continue to work closely with the Financial Conduct Authority to ensure they have a good understanding of this highly competitive and diverse market”. Given the lack of evidence of any systemic problem, and a growing diverse motor finance market, there must be a real prospect the FCA will consider the market is functioning well. But whatever view the FCA comes to, we would expect that the FCA takes steps to allow lenders to communicate with borrowers in an interactive and accessible way, and not simply copy across its approach from the significantly different mortgage market.
This article was originally published in Thomson Reuters on 30 May 2017.
On 12 October 2018, the FCA published a Guidance Consultation (GC 18/4) on the Senior Managers and Certification Regime on statements of responsibilities (SoRs) and responsibilities maps (which apply to enhanced firms).