FCA chief defends car finance despite fears it could lead to next financial crisis

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The head of Britain's financial watchdog has defended the use of car finance products despite widespread fears they could herald the next financial crisis.

Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), said the growing popularity of auto loans was not “bad”, but showed consumers were more happy renting than owning a car.

However, he said the FCA was “not complacent” and there were “issues” with how well consumers understood the terms of the products.

It comes amid concerns that the rapid growth in auto lending could spark an economic crash if the UK is suddenly hit by rising unemployment or higher interest rates.

In a speech at Mansion House, Mr Bailey said: “We are not at all complacent about the overall consumer credit situation, but I don't regard, for instance, the shift to PCP-based lending as per se bad.

“It seems to me to recognise the nature of a car as an asset, that is, consumers are comfortable renting rather than owning the car.

“That said, there are issues that we seek to understand on the terms of such lending and how well they are understood by consumers, so we are not complacent on such terms.”

The acceleration in car finance debt has been driven by products such as personal contract purchase (PCP) plans, where consumers make small monthly payments over a two to four-year period before paying a lump sum, or handing the keys back, when the contract ends.

Mr Bailey said motor finance counted for around £58 billion of Britain's consumer debt pile of £200 billion, with the lion's share coming from £68 billion of credit card debt.

He also warned over the problems triggered by the high cost of credit, with around five million people struggling to pay off their balance and facing long-term expensive debt.

He added: “It is not untypical for such consumers to be paying around £2.50 in interest and charges for every pound of balance they repay.

“Firms can lack incentives to tackle this as these customers are profitable.”

PA