Why car finance professionals need to prepare for the inevitable
Will the motor finance industry follow in the footsteps of the mortgage sector and introduce an affordability process?
Mark Lloyd weighs up the likelihood and need for such an exercise
“We are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry”.
These are not my words, or any other person or firm’s words involved in the motor industry, they are taken directly from the Financial Conduct Authority’s (FCA) 2017/18 business plan.
There is much speculation, but crucially, wide acceptance within the motor finance sector that close regulator scrutiny is coming our way with concerns about irresponsible lending.
So, will motor finance end up like the mortgage market with the affordability process, and should it?
To consider this, we first need a solid understanding of what is happening with regard to affordability assessments in the mortgage market before we take an honest look closer to home in terms of motor finance.
If you’ve applied for a mortgage, or remortgaged recently, you may have a story to tell of an in-depth interview whereby all of your spending habits have been dissected in fine detail. Alternatively, you may have had a relatively painless experience by way of giving some fairly straightforward information about what goes in and out. Either way, you will have been assessed to check you can afford the mortgage you want.
The reasons for this are obvious in a number of ways. Firstly, culturally, we expect mortgage providers to look closely at what we can afford. The 2008 crash was inextricably linked to unaffordable loans secured on property, and as such, this was to be the first area in which firms pulled their socks up and ensured they got it right. No more 125 percent LTV mortgages, hardly any self-certify products being available. This is common sense. But where are we now in the mortgage space in terms of what lenders must do?
CROSSHEAD: The rulebook
To answer this, I peer into the relevant FCA rules that details everything a mortgage lender must do, in order to be satisfied that the customer can afford the product.
This is not the place to provide a long list of what must go into an affordability assessment, but highlights include not taking any existing equity into account that a customer may have on a current property, taking full account of the customer’s income and expenditure and considering what the customer needs financially with regards to the basic cost of living. Briefly, it goes on to say that the lender must consider any likely future changes in income and expenditure on the part of the customer as well as telling lenders they must have policies in place setting out how they will make affordability assessments.
Turning back to our own area of interest, the affordability assessment requirements on motor finance lenders are detailed in CONC. The rules show we are required to assess whether the customer can afford the product, we are encouraged to consider income and expenditure, and establish and implement clear policies to allow us to make a reasonable creditworthiness assessment of the customer.
Now, it is acknowledged that the two sections of the FCA rules on affordability are not identical. In fact, the mortgage rules are far more detailed. But what is absolutely unavoidable, and clear even from the basic comparison above, is that the FCA expect motor finance professionals to be operating in a similar, if not identical, manner to mortgage providers. If they did not have this view, why would there be so much common ground between the two sets of rules?
So, will our industry introduce such stringent affordability checks? The answer to this is in our hands. We can shape a good, effective affordability assessment ourselves.
This does not necessarily need to mimic a mortgage affordability assessment. If we accept that there are varying degrees of scrutiny applied across the motor finance lender spectrum, then we also accept that at least some of us need to do more.
In conclusion, we know the regulator will be looking closely in this area. The ball is in our court to get our affairs in order.