With Governmental and Bank of England concern over the growing non-mortgage household debt to income ratio, and the rising cost of credit, it was a matter of time before the regulator took steps to actively address those sectors that have accounted for the greatest increases in debt levels – with the motor finance industry being called out for special attention.

Car financing accounts for a significant proportion of debt growth – 90% of new car sales in the UK are now sold on Personal Contract Plans. It is therefore prominent in the Bank of England’s national debt figures, but it is important to remember that unlike some forms of debt, motor finance is secured by an asset.

It would be unfair to brand all firms offering motor finance as unethical, or to be undermining national economic interests, as has been done in recent weeks.  It is important however to ensure that firms ensure good outcomes for consumers. Finance offers need to be transparent, fair and affordable, and organisations have to be responsible for this by governing their core business processes and culture. The latest announcements from the Financial Conduct Authority (FCA) are aimed at achieving just that.

In its recently published business plan (FY17/18), the FCA states “(we) will begin an exploratory piece of work into the motor finance sector”. The principle concerns raised by the FCA are lack of transparency, conflict of interest and irresponsible lending. Sales processes, due diligence and whether products cause detriment will all come under scrutiny

Whilst this is a significant move by the regulator to address a potential perfect storm of macroeconomic factors:

  • Huge market growth last year, culminating in £40bn of lending
  • The contribution this now makes to the overall household (non-mortgage related) debt
  • Potential impact of a rise in interest rates
  • Increasing levels of sub-prime lending
  • Reduction in second-hand car prices impacting residual values

Tens of thousands of consumer credit firms have successfully received FCA authorisation – enabling them to now reallocate resources to supervising firms with the time to ‘look under the bonnet’ of the sector. Indicative of intent, particularly before any review has even been commissioned, the FCA has suggested it will assess “whether and how to intervene in the market.”



A likely next step is a Thematic Review, which means that the FCA will approach several firms that represent a cross-section of the sector and ask them to provide information. This is usually followed by site visits before the findings and initial recommendations are published – often in the form of a Discussion or Consultation paper. However, if more urgent intervention is considered necessary, there could be a “Dear CEO” letter issued to firms.

For those firms selected to participate in the review, if the FCA were to find significant failings they can commence enforcement action immediately, which is a time consuming and costly exercise. Whilst this type of intervention is not uncommon in other areas of consumer credit that have been subject to previous close-scrutiny (e.g. high-cost short-term credit), it would be new to motor finance.



Based on what the FCA said it would be reasonable to expect that they investigate the following areas:

Irresponsible lending

Are proper affordability and creditworthiness checks being conducted by lenders, and do lenders have comprehensive and effective underwriting procedures?

Lack of transparency

Are firms giving appropriate prominence to the restrictions and limitations of certain types of products as well as their benefits? For example, too many websites and other financial promotions focus almost exclusively on low monthly costs with little or no mention of product restrictions and other potential charges.

Conflicts of interest

Are the structures of commissions paid by funders to brokers and dealers leading to adverse outcomes for customers? What about firms’ own remuneration structures, do these promote good outcomes for customers?

Due diligence

Currently, firms simply must ensure credit and hire products are affordable and “not unsuitable”. The FCA may want to look at whether this test provides sufficient safeguards for consumers. Perhaps brokers and dealers might be required in future to consider the full range of different finance and non-finance options available so that motor finance customers can make informed choices between them.



Operating under FCA regulation is still a relatively new experience for even the most successful and largest businesses in the industry. As a result, many of its professionals, directors and business owners have yet to truly experience first-hand the impact of intense regulatory supervision, nor have they been subjected to enforcement and fines.

This announcement should also be considered against the backdrop of next year’s introduction of the Senior Management & Certification Regime (SM&CR), which will replace the Approved Person Regime (APER) for all consumer credit firms. The purpose of which is to ensure transparency of roles and responsibility amongst a firm’s directors (and those in positions of influence), thereby making it easier for the regulator to hold individuals to account.

Many firms will welcome this announcement.  It is an opportunity for the sector to demonstrate its commitment to fair customer outcomes through compliant, efficient and ethical business practices – however, a vast number will be feeling exposed.

In mitigating any risk organisations need to work with the regulator and proactively review their business models, processes and conduct to ensure they are compliant with regulatory requirements and drive a culture that supports fair customer treatment. Should a firm be called on by the FCA, there will be a requirement to evidence that buying decisions are being driven by the customer rather than the the firms own commercial interests. Those that are aware of existing or legacy conduct issues should be taking immediate steps to remediate, and redress where appropriate.

With firms now authorised the Regulator is moving to supervision and enforcement. Firms that adopt a ‘wait and see’ stance may find themselves to have done too little, too late.

Now is the time for motor finance firms to take proactive measures to ensure their business models are not only commercially viable, but also comply with FCA regulations and deliver fair customer outcomes. In ensuring your organisation meets its responsibilities, the appointment of an expert consumer credit consultancy, such as CCAS, could prove invaluable.

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