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FCA pushes payment holidays for motor finance customers

20 April 2020: The Financial Conduct Authority’s payment holiday proposals offer some relief to those with car or high-cost finance, but risk looms for lenders facing increased exposure to defaults.

The Financial Conduct Authority (FCA) has announced it will consult with motor finance and high-cost credit firms over payment holidays for consumers struggling with motor finance payments and high-cost credit during the coronavirus pandemic.
 
The watchdog has proposed:

  • a one-month interest-free payment freeze to customers for high-cost credit providers, which includes payday lenders.
  • a three-month payment freeze for the rent-to-own, pawnbroking and buy-now-pay-later markets, including the suspension of repossessions or charges or fees.
  • a three-month payment freeze for customers struggling with finance or leasing payments, including no changes to their motor finance personal contract purchases (PCP) deals.

As with many of the regulatory responses to COVID-19 the consultation window is short, with stakeholders asked to respond by 5pm on Monday 20 April.

Banks face PCP exposure risk

Motor finance is the second largest consumer credit market in the UK after the mortgage market.
 
Personal Contract Purchase (PCP) is one of three car finance products used by lenders to stimulate new car sales in recent years, alongside Personal Contract Hire and Leasing.
 
Over 90% of all new car sales are financed, and lenders in this market wrote over £46bn worth of car finance in 2018, according to market trade association the Finance & Leasing Association (FLA).
 
80% of those financed arrangements are through PCP.

Consumer rights in PCP 

Personal Contract Purchase differs from the other two finance agreements because of the risk that lenders take on.
 
Consumers can either pay and own the car at the end of the agreement or hand the car back. Lenders then sell the car on the second-hand market to release the residual value.
 
By doing so, lenders remove car depreciation risk from consumers, but this adds risk to their balance sheet until the car is sold.
 
The regulator has said in the consultation that firms should not use any temporary depreciation of car prices caused by coronavirus volatility to recalculate Personal Contract Purchase (PCP) balloon payments at the end of the term of their finance agreement or must act fairly if doing so.
 
Consumers who want to keep their vehicle at the end of their PCP agreement, but do not have the cash to cover the balloon payment due to coronavirus difficulties, must be allowed a payment plan or means of an appropriate solution.

Huge pressure on lenders

The new car finance market is mostly inhabited by banks owned by the car manufacturers (‘captives’), or bank-backed car finance houses like Lloyd’s Black Horse. 
 
Bank lenders will already be facing the prospect of three-month mortgage holidays, overdraft fee suspension for current accounts and credit card interest suspensions.
 
Under current consumer credit legislation, if the customer has paid back 50% of the PCP deal it may voluntarily terminate the contract and hand back the car. The race will be on to avoid this happening all at once.
 
The second-hand car market will be used to realise value for banks’ balance sheets, and it is frozen for as long as the lockdown lasts.
 
Second-hand values will drop if cars are handed back at the same time and demand is subdued in the second-hand sales market owing to the pandemic, which could lead to write-downs on bank balance sheets.
 
Lenders are therefore under pressure to do as much as possible to “keep consumers in their cars”.
 
Car finance providers are already fielding 20-30 times the numbers of calls about relief on car finance, according to information from the FLA passed to the Financial Times.
 
The calls, said the FT, are prompting fears by banks of large exposure to defaults.

For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated coronavirus hub.