The Bank of England’s (BoE) Prudential Regulation Authority (PRA) has found motor finance lenders are using a ‘reasonably prudent approach’ to setting Guaranteed Future Values (GFVs).
In July last year, the PRA said it planned to ask major motor finance lenders about the potential impact a fall in used car prices could have on financial performance and capital.
At the time, it said it wanted to be sure that lenders were assessing the ability of their books to withstand a significant downturn in used car prices, after the BoE warned lenders might have been paying ‘undue weight’ on recent economic performance.
Having consulted with the major lenders, the PRA has now said PRA-regulated firms providing motor finance have adopted a reasonably prudent approach to GFV setting, ranging from 85 to 95% of expected future value.
It was not all good news, however. The banking authority also noted that firms’ stress tests tended to assume a smaller reduction in used car prices than the Financial Policy Committee considered appropriate for severe stress. It also said firms seemed to be underestimating the potential for structural changes in the market to amplify price movements – for example, the prevalence of PCP deals and changing attitudes towards diesel.
As a next step, the PRA said it would consider what guidance on used car price stress to communicate to affected firms as part of its 2018 stress test.
The PRA had also consulted the wider consumer credit industry on whether firms were interpreting the FCA’s Consumer Credit Sourcebook (CONC) prudently and consistently across products, and whether customer total indebtedness was being included in underwriting.
It said that all firms attested that CONC was interpreted prudently, though many acknowledged inconsistencies in application across products. Additionally, most firms said they capture a borrower’s total debt in application.