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Beware of risk in the growing car finance market

22 January 2020: members working for banks and lenders in the car finance market need to be aware of its changing face and associated risks. These include 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 this time, the franchise model of car dealerships in the UK has 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. 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.