In a speech this week, Alex Brazier, executive director of financial stability at the Bank of England, and a member of the Bank’s Financial Policy Committee, set out a list of facts about the car finance market.
The facts indicate the Bank has become a little less concerned about the impacts of possible car finance market issues on the wider economy, even if (Brazier suggested) shareholders of car companies and banks involved might wish to “think very carefully about the risks” of providing PCP.
- 70% of those taking out PCP plans have above average income.
- Arrears rates on banks’ car finance deals are lower than other forms of consumer credit.
- Excluding [optional] balloon payments at end of contract, car finance debt accounts for only 1.2% of aggregate household income, and outstanding debt on other forms of consumer credit is 10 times that.
- The ‘run-up’ in car spending has added only 0.6% to consumer spending.
- The growth in car finance is slowing and new registrations have fallen.
- The lenders are predominantly the captives, not the banks, and the impact of any possible losses therefore pale into insignificance for the wider economy.
- Very sharp falls in used car prices would result in only small losses for the banking system.
- Banks’ own PCP deals have a cushion between expected used car values and the final balloon payment.
It’s quite different from the Bank’s previous comments on the risks to the wider economy from car finance.
It’s also a different tone to other parts of the speech, which is being widely reported today as the Bank warning of a “spiral of complacency” on consumer lending.
So far so good, but there might still be a point of confusion at Threadneedle Street. Brazier noted that PCP plans accounted for one-in-five new car purchases in 2006. Now they finance nearly four-in-five.
“At the aggregate level, PCP is the new cash purchase,” he said.
Can that be right? Is it really the case that in 2006 most consumers were carefully building up their savings accounts before buying new cars with cash, rather than using more traditional types of car loans?
The statistics do indeed show a tripling in dealer point of sale finance over the last 10 years, but could some of this reflect nothing more than lenders collecting and reporting more accurate information on whether customers were introduced to them by dealers?
Brazier concluded that the 'defence lines' the Bank has put in place to address concerns over household debt, including car finance, appear to be making the economy a safer place. It’s far from a clean bill of health for car finance.
The FCA’s initial review of the market is still at an early stage and the speech provides another signal that a close look is being taken at broking and lending practices for sub-prime consumers.
For the mainstream motor finance industry, however, the speech will provide some reassurance that the Bank has confidence in its existing measures and no drastic new prudential interventions for car finance will prove necessary - at least for the summer...
Julian Rose is director of consultancy Asset Finance Policy (www.assetfinancepolicy.co.uk) and runs the Asset Finance 500 directory of asset finance brokers (www.assetfinance500.uk). He prepares the annual AF50, the UK’s most influential annual survey of business and equipment lessors, and is the author of the newly published A to Z of Leasing and Asset Finance and UK Car Dealer Point of Sale Finance, which is published next month by Apex Insight. For details email firstname.lastname@example.org.