Is Car Finance steering towards a crash? The 4 things lenders should do to build resilience - Target Group
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A company Is Car Finance steering towards a crash? The 4 things lenders should do to build resilience Summary • Increasing popularity of PCP over recent years • Oversupply of second-hand cars in the market • Government crack-down on diesel cars to devalue the product • Consumer incomes are already stretched • An increase in interest rates is likely to put households into arrears • How can lenders ensure they’re ready to cope? www.targetgroup.com
Introduction
Despite slow economic growth in the UK, the car industry has boomed in recent
times. We look at the risk of overheating, and discuss what lenders can do to build
resilience.
Businesses and consumers both felt the long-term collateral damage from the 2008
economic storm caused by the Global Financial Crisis, some of which continues
today.
So, what’s causing the current bumps in the road?
Interest rate hike on the horizon? Increasing popularity of PCP Affordability under pressure
With the planned UK departure Since the GFC and the introduction The UK Brexit planning so far has
from the EU, there is still significant of the vehicle scrappage scheme, already seen disruption and pressure
uncertainty and therefore volatility the motor industry has seen a rapid on the jobs market with companies
in the markets. We may see a cut to increase in PCP finance. The Finance suggesting or actively moving
0.5% in the next 12 months, but there and Leasing Association recorded operations out of the UK and into the
are also indications of an interest over 940,000 new vehicles bought remainder of the EU; companies like
rate increase. When we start to see on finance in the 12 months to Aviva, BAML, Barclays, Credit Suisse
more market stability, whenever that September 2019, with a loan value of and Moneygram. Some businesses
may be, and we return to economic £19bn. simply won’t be able to survive the
growth in the UK, it’s likely we will uncertainty.
see an increase in interest rates to Bank of England figures estimate that
help control inflation. An increase in growth averaged 20% a year since UK employment is at an all-time high,
interest rates will put further significant 2012, increasing by more than £30 but will that remain the case once
pressure on UK consumers, many of billion in that period. the full Brexit process gets underway.
whom are already feeling the strain, So, while the GFC has created a new
and have been for some time. There’s been a growing reliance wave of affordability testing, that is
on this low-cost form of finance, only dependent on the consumer’s
According to the ONS, British especially among those with low current circumstances.
households have spent more than credit ratings. Estimates suggest 3%
their income for an unprecedented of the PCP market in the UK is sub- How much does it take into account
nine consecutive quarters (Oct 2016 prime, perhaps due to lenders having the risk of unemployment, or the
to Dec 2018), caused by sluggish pushed consumer credit growth increase in interest rates? People
wage growth since the GFC of 2008, to compensate for the weakened who had their first mortgage or
cuts to benefits, and a drop in the mortgage market. PCP loan post-2008 will only have
value of the pound since the Brexit experienced super-low interest rates.
referendum vote raising prices of They’re undertaking riskier lending in Many will have no concept of 3, 4
imports. order to reap higher yields. But is this or 5% base rates, and may not have
sustainable? With diesel car prices factored in such rates when assessing
expected to plummet with incoming their own borrowing affordability.
regulation, PCP lenders will need to
compensate for such losses, as their
assets lose market value.
www.targetgroup.com
What does the PCP market look like? A bumpy road ahead Debt charities are expecting a
further wave of consumers getting
We are likely to see further The motor finance industry doesn’t into arrears on loans, including PCP,
clampdowns on diesel cars in a bid seem to have been under the same because of the trinity of inflation,
to improve air quality, with demand level of scrutiny as banking, until only increasing interest rates and
on these vehicles sure to fall. PCP recently when the FCA conducted a unemployment.
lenders will start to see diesel cars as multi-firm review of the sector in 2019.
riskier assets and raise prices, and are The growth of this sector in the UK has Many people with loans in the UK
likely to see negative equity on diesel put the situation on the agenda for won’t have experienced the pre GFC
cars already out in the market. And regulators. rates of 4-7% plus, let alone the 10-
it’s not just diesel cars that could be 17% rates of the 1970s and 80s.
devalued. Overdue car loan repayments in
the US have risen to levels not seen While their debt is currently
David Oldfield, head of retail banking since the GFC. In 2017, 6.3 million affordable, interest rate increases
at Lloyds Banking Group, says there Americans are at least 90 days late of just one or two percentage
could be trouble ahead for parts of on their car finance payments, an points could stretch their household
the industry after a 30 per cent surge increase of about 400,000 from a repayments beyond their means,
in car sales in the past four years, year earlier, according to New York and send thousands of borrowers into
which could depress the pricing of Federal Reserve data published arrears.
used cars. in November. Worryingly, overdue
payments by people under 30 are
“We expect there will be an rising sharply, the report said.
oversupply of used cars going
forward given the strong demand for Pressure on incomes from either
new cars in recent years,” he says. unemployment, a hike in interest
rates, or both, has the potential to
PCP lenders supply cars to the increase the likelihood of people
market with the borrower simply going into arrears, and lenders should
covering the cost of depreciation. be prepared. Handling arrears to
If depreciation of cars increases, as achieve a good customer outcome
predicted, such a system is likely to is challenging. One of the biggest
become less financially viable for challenges is that these instances
consumers, especially when coupled often come in cycles with peaks and
with further pressure on incomes from troughs, often leaving providers less
interest rates, unemployment and prepared than they would like, for
inflation. the sudden increase in demand.
Is Car Finance steering towards a crash?What should lenders do to ensure resilience?
Lenders have a duty of care to be able to provide appropriate support their customers
who are in arrears. It’s a big focus of the regulator, and high on the agenda across the
industry. The need to safeguard and protect customers, using an integrated, enterprise
level approach is key.
Capacity Training IT systems Culture
• Capacity • IT systems • Culture
Is your business able to quickly A peak in demand for service, When things get tough, and
and easily scale up (or down) its such as might occur with a spike in resilience is tested, it’s essential that
operations to be able to handle an people entering arrears, will likely operational culture holds firm. There
increase in customers in arrears? put a strain on IT systems. Can your should be a socially aware and
Will you be able to achieve SLAs systems cope with more traffic? Will ethically conscious approach to
and maintain customer service your security set up still be able to vulnerable customers, who may be
levels, if the demand for those keep your environment safe and finding it harder to pay. Businesses
services spiked? secure, even when under strain? dealing with customers in arrears
can’t afford to let standards drop
• Training or lose its culture of supporting
If there is a sudden need for good customer outcomes, when
additional heads in your customer resilience is put under pressure.
service teams, how long will it
take to get them up to speed, to
be able to deliver at the required
standard?
www.targetgroup.comSummary
What’s important about operational resilience is preparation. By fully assessing impact
tolerances, lenders can be prepared for big changes when they happen, and be best
placed to handle them, without dropping standards or customer service.
Outsourcing such servicing to a Target is a leading provider of For further information:
specialist in arrears handling is one business process servicing and
option that will help lenders to deal operational transformation for over visit www.targetgroup.com or
with peaks and troughs in demand. 50 major financial institutions across email marketing@targetgroup.com
Such providers have the capacity, the globe, including clients such as
training and IT systems in place, DVLA, RBS, Barclays and Santander.
ready to scale up quickly to support
good customer outcomes, and are Our leading fintech platform
able to ensure quality standards manages assets in excess of
are maintained even at the most £25 billion, enabling our clients
demanding times. to automate complex critical
processing, servicing and
administration of loans. Alongside
loan servicing and software solutions,
Target leverages deep financial
domain expertise to advise on
process improvement, due diligence,
and regulatory compliance.
Terry is responsible for building Terry’s previous experience also
upon an established compliance includes working for the regulator.
foundation and reinforcing and He joined the Personal Investment
maintaining the risk and compliance Authority, which merged into the
framework that adds value to our Financial Services Authority in 2000.
business and clients. During this time, Terry conducted
a number of regulatory reviews on
Prior to joining Target, Terry worked large financial services organisations
in professional services with and was recognised as one of three
Grant Thornton as a Director in its specialists within The FSA in Training
regulatory practice. Terry’s practical and Competence.
experience includes most financial
services sectors, including retail and
investment banking, insurance and
TERRY BAXTER
intermediaries.
Group Compliance Director
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