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Significant growth in the UK motor finance market has resulted in both increased scrutiny from regulators and ongoing competition from financial services challenges. Lenders, brokers and vehicle manufacturers should all take steps now, and in the longer term, to protect their market position.

Regulatory focus on the third-largest lending sector

In 2018 the UK motor finance market reached £64bn, making it the third-largest lending sector. Research shows that UK consumers trade their cars more frequently than elsewhere in Europe and the hold periods have been coming down, largely as a result of greater availability of finance.

Furthermore, affordable secured finance offers, driven in part by low-interest rates, have led to a decrease in willingness of UK drivers to pay upfront for a car, driving expectations that the consumer car finance market in the UK will continue to expand. The proportion of drivers saying they will opt for finance, leasing or renting for their next car has increased by 15% (from 37% in 2018 to 43% in 2019).

As a result of this significant upward trend, the UK motor finance sector has been the biggest contributor to consumer credit growth in recent years, thus attracting regulatory attention. There has been speculation of a ‘bubble’ and concerns expressed by the Financial Conduct Authority (FCA), responsible for the regulation of this sector since 2014 which remain prevalent today.

The fears of a bubble can be dissipated in part by the fact that secured automotive finance is replacing other forms of finance that were previously used, like credit cards, unsecured personal loans and second charge mortgage. There is an industry-wide recognition that car finance is conservatively modelled and asset-backed, with the FCA acknowledging that PCP (Personal Contract Purchase) agreements, the most common use of car finance, provide flexibility and lower monthly costs due to the design of the product. It also concluded that the largest lenders are adequately managing the risks from a potential fall in used car values.

On the downside, however, a review recently concluded by the FCA has found that:

  • Not all lenders were complying with FCA rules on assessing creditworthiness, including affordability

  • Some motor dealers are overcharging customer interest charges in order to obtain bigger commission pay-outs for themselves. This may be due to:

    • Lenders not appearing to adequately manage commission arrangements to reward car retailers and other credit brokers

    • Lack of transparency to consumers, who are not given the right kind of information at the right time to make informed decisions

As a result, the FCA is considering changes to the way commission works in the motor finance sector that could lead to tightening rules and new policy interventions, like banning certain commission models or limiting broker discretion altogether.

Short term responses to these challenges

These findings, in conjunction with new guidelines and rules for assessing creditworthiness in consumer credit, will create a challenging environment for the motor finance industry. Early adopters of change through the use of innovative technological solutions may benefit from more consumer-focused outcomes and gain a competitive advantage.

To address some of these challenges in the short term, major industry players will need to consider the following:

  • Lenders must ensure their controls frameworks adequately assess brokers’ compliance with all relevant rules, but especially remuneration and disclosure rules. They should also consider how a ban or restriction on certain commission models would affect their revenue. It is likely a move to flat fee models would reduce interest rates overall, reducing income. Finally, they should review their processes, scorecards and data quality. Creditworthiness assessments must take into account the affordability implications for the consumer

  • Brokers need to add commission disclosures to documentation or scripts in order to comply with rules. They should also consider how products can be presented in a fairer and balanced way to consumers

  • Vehicle manufacturers should pay attention to developments and consider whether changes to affordability assessments, commission and customer understanding will affect sales volumes and, subsequently, production

New strategies to remain competitive

These short term steps alone will not guarantee long term sustainability, particularly in a highly competitive industry with growth expected to continue through new market entrants launching attractive new business models to consumers, with most recent studies showing that a significant percentage of drivers (almost 90% according to certain sources) are “confident” or “completely confident” about financing a car online.

It is anticipated that start-ups and tech companies will lead the ranking of lending companies in 2020, when until recently it has been the Independent Finance and Leasing Providers and Banks in the first position (the former could actually fall to a fourth position in the ranking)

The traditional model of motor finance - One vehicle, one payment, one player on the transaction – has begun to compete with new models such as:

  • Subscription models, in which consumers pay a flat fee for access to the car of their choice with no down payment - Volvo and Jaguar Land Rover have both launched all-in-one subscription models
  • Shared ownership, in which a single vehicle is owned by more than one person

Factors such as finance moving online with seamless transition between online and offline, omnichannel presence, mobility, and customisation are shaping a fast-changing environment, where motor finance players will have to respond with strategies to own the customer relationship end-to-end, simplify the payments process, and partner with (or compete with) start-ups moving into the space:

Traditional lenders will need to have a clear strategy if they want to continue to be an attractive option for new customers: being available to customers anywhere at any time, promoting convenience and transparency with effortless experience from the online discovery through to driving away in their new cars

Dealers will need to offer a wider variety of options, not just transitioning to all online. The role of physical locations, such as dealerships still has a major role to play. The choice has to be with the consumer and there will always be some that prefer to do things in person (for 87% of drivers, visiting the showroom is still an important part of the buying process)

Finally, car manufacturers will need to consider offering the option to buy and finance a car online whilst continuing to involve their existing dealer networks.

All players will need to consider shifting away from pure products to integrated services that embrace the life cycle of the client’s ‘purchasing’ experience.

Mobility-as-a-service is expected to drive growth and profitability, with opportunities arising from the provision of innovative packages which combine standard components (financing, insurance, technical coverage) with mobility solutions (multiple modes of transportation).




Nieves Perez-Minana
Principal Consultant
Email Nieves

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