FCA has published further details of what it is doing to identify potential consumer harm in the motor finance market. It notes most new car finance is in the form of a Personal Contract Purchase, which is a form of hire purchase under which the value of the car at the end of the contract is assessed at the start of it and deferred (the Guaranteed Future Value – GFV), which results in lower monthly payments. At the end of the term, consumers can buy the car for the GFV, enter into a new agreement or give the car back (which will usually entail some costs). FCA has found that consumers are often approached before the end of a contract with the offer of a new one, if they have built up equity.
PRA has noted the explicit risk exposure to the GFV for lenders when there is a PCP. FCA sees less risk for consumers, but notes there may have been inadequate affordability assessments or lack of clear understanding of the contract by the consumer.
FCA notes there are many other options for motor finance and that the market uses a particular terminology and specific methods to generate margins on sales, with the latter often being linked to finance packages.
It is now focusing its work on
- ensuring firms lend responsibly
- identifying conflicts that arise from commission arrangements between dealers and lenders
- making sure customers have clear and transparent information and
- checking firms are managing the risks of falling asset valuations.