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Beware of risk in the growing car finance market

Members working for banks and lenders in the car finance market need to be aware of the changing face of the car finance market and associated risks. This includes the likely growth of consumer redress should there be a financial downturn.

Over 91% of all new cars are now bought on finance in the UK as the country follows the American model of car ownership. Cars are now a consumer debt, not an asset. As a result, the car finance market has grown significantly in the past decade, becoming the second largest UK consumer lending market after mortgages.

During that time, the franchise model of car dealerships in the UK led to variation in the sale of finance, meaning some car finance that was sold may have been inappropriate, as case rulings from the Financial Ombudsman sometimes show.

Some of those rulings have set precedents for consumer lending that could lead to future claims against the industry, as experts from Deloitte have feared – some Financial Ombudsman rulings could open captive finance banks to claims by consumers that could challenge the bottom line and interest the PRA.

FCA regulations on customer affordability and vulnerability are key, with further motor finance regulation expected to target variable commissions due in 2020. Asset backed securitisations have been raised from the motor finance market throughout this time, thereby augmenting the risk further.

Members should be aware that elements of systemic risk exist until car finance credit agreements (3-5 years) have elapsed after the start of expected FCA regulation in 2020.