PCP: The sky is falling

Rising media attention on concerns around PCP products in the car finance market have left many wondering what action the regulator may take

PCP: The sky is falling

I’m looking at how a specific story has played out in the market.

The story is, ostensibly, a looming crisis in car finance. The heavy use of low-cost PCP products to drive up UK car retail volumes, the logic goes, has created a house of cards which will fall when interest rates rise and/or used car prices drop, causing grief for companies and customers alike.   

There’s much more to it, but that’s what it boils down to; a basic concern that PCP-driven growth is unsustainable and stacking up problems for the near future.

The issue emerged in a BoE ‘Bank Underground’ blog late last year, entitled Car finance – is the industry speeding?, which argued that manufacturer finance strategy was leaving OEMs vulnerable to macro-economic shocks, and was in itself exacerbating the cyclicality of new car sales.

In January, Andrew Evans at Schroders blogged about the issue. Crucially, he also raised separate concerns about risks he felt were being taken on by the sub-prime end of the market, a world away from the big captive PCP providers.

This distinction did not make it through to the Guardian when it picked up the thread in early February. The story they published was a general shout of alarm, intermingling discussion of PCP and subprime lending.

Now the FT has weighed in with a feature entitled Are the wheels about to fall off car finance? Despite the headline (car metaphors are mandatory when the mainstream press covers car finance), it does a pretty good job of bringing the discourse back in line with what people are saying within the industry.

And what are people saying? Quite simply, that while PCP does have the potential to bruise some balance sheets in the face of certain macro-economic triggers, it’s no surprise, and is something most providers are geared in recognition of. Yes, there are some players with more exposure, but there doesn’t seem to be any looming doomsday scenario.

Unfortunately, this will not help the headlines. Every financial journalist wants to be the person who predicts the next crash, and more people will read an article with a headline about car crashes and flashing lights than one about conservative setting of guaranteed final values.

And if you get enough of that kind of headline, regulators tend to take notice. Just after the FT article, Jonathan Davidson, director of supervision for retail and authorisations at the FCA, said: “Our analysis showed that changes to the car financing model have played a major role in the rapid growth in lending figures. The biggest of these has been the shift towards Personal Contract Plans (PCPs), and the lower monthly payments required by these plans have acted as a significant driver of growth in car sales and financing volumes.

“Relevant here is not just the question of affordability, but also whether consumers are able to compare and choose effectively between financing options.

“There is a lot to think about in assessing whether consumers are achieving good outcomes in the car finance sector.”

To me, this seems reasonable – “we have gathered there may be an issue here. We’re not certain what it is, however, so you have a good head start to fix it”.

So far, the FCA has yet to put much of a focus onto the car finance market. It will be interesting to see, given how vital a role manufacturer finance plays in UK auto retail, what approach the regulator will take.