Lenders told to be vigilant over loans

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£20 notesImage source, Reuters

Lenders have been told to raise their game after regulators highlighted the risks in the consumer credit market.

The Bank of England's Prudential Regulation Authority (PRA) has highlighted various concerns during a review of lending in personal loans, credit cards and car finance.

While it did not find looser credit scoring on the scale seen before the financial crisis it has told banks and others to address specific concerns.

They must respond by September.

The Bank has consistently expressed the need for vigilance over double-digit growth in the consumer credit market during "benign" economic conditions. Over the same period household income only rose by 2.3%.

Last week, it said banks needed to find a further £11.4bn in the next 18 month to beef up their finances against the risk of bad loans.

They will also face earlier stress tests to ensure they can cope with loans failing to be repaid.

Car finance

One of the key areas of interest is the car finance market - which the PRA described as the fastest growing consumer credit product.

Personal Contract Purchase (PCP) deals are central to this. Instead of buying a car outright, a PCP allows a consumer to rent the car over a three-year period. Regular payments cover the depreciation in the car's value. At the end of the deal, the customer can hand it back or buy the car outright at a "guaranteed future value".

However, the PRA said many lenders were setting this level very high and were exposed to a significant downturn in the used car market.

As a result, it has told major lenders to estimate the impact of a fall in used car prices at 10% increments.

Image caption,
Car finance borrowing is rising rapidly

The PRA review has also raised other various issues including:

  • A need for lenders to assess the credit scoring of a "new generation of borrowers" who have had no experience of higher interest rates
  • The need to take a borrower's total debt, including mortgage debt, into account when lending
  • Firms should justify assumptions when setting 0% credit card balance transfer deals

No new rules are being outlined, but company boards are being made directly responsible for the response to the PRA to prove they are not taking any undue risks.

Credit card offers

The PRA, which looks at the wider state of the economy, regulates 80% of the market for credit cards and personal loans, and about 40% of the car finance market. Its review covered a range of about 20 providers.

It did not conclude that looser credit checks were behind the growth in consumer credit, but expressed worries about future underwriting standards.

The Financial Conduct Authority, which authorises lenders, is conducting its own reviews into high-cost credit, which is expected to be published later in July, and into car finance.

Data released by the PRA show that the length of 0% credit card balance transfer offers has increased sharply in the last five years. The length of these interest-free deals can extend to 43 months - or three-and-a-half years, with the average at nearly 30 months.

The PRA highlighted concerns over monitoring of these deals.

It also said that personal loans were getting cheaper, and that short borrowing terms had a risk of going bad if lending terms were relaxed.

In a separate development, the FCA has highlighted risks with staff incentives at credit firms.

It reviewed 98 firms and found that some had "inadequate systems and controls" to manage the risks of staff earning bonuses by increasing lending.