The winds of change are building for consumer credit

There can be little doubt that the consumer credit market is set to face major change, with an increase in interest rates now firmly on the cards and the Bank of England signalling for increased lending prudence. Following virtually a decade of upward growth for our sector, the motor finance sector needs to be prepared for what for many will be a new experience, rising interest rates and tighter credit conditions,” observes Karl Werner CEO of MotoNovo Finance’s Motor Division, reflecting on the latest Bank of England Financial Policy Committee (FPC) Statement.

Published on September 25^th from the FPC meeting on September 20^th, the Bank of England makes it very clear that the lending community, at least in part, risk underestimating the impact of a rise in consumer defaults in an economic downturn, noting;

“Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit.  Although the overall credit quality of consumer credit has improved significantly since the financial crisis, the FPC judges that lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality.  As a result, they have been underestimating the losses they could incur in a downturn.”

Within the Statement, the Bank of England estimates that in a “severe downturn,” UK banks could incur losses of £30bn.

The signal for an increase in prudence from the Bank of England have been building throughout 2017. There has been a growing concern about the expansion of consumer indebtedness and the capacity of consumers to manage their credit in the event of a rise in interest rates. With all the signals that the first increase in interest rates in more than a decade is now firmly on the cards, evidenced by a sharp rise in LIBOR money costs, the risks of an increase in bad debt are very apparent.

“The winds of change in consumer credit have been building for a while now; it is time to re-calibrate in certain areas, notably risk management and pricing. As a business, our success and that of our dealers has come from a long-term approach and seizing ‘first mover advantage’ in areas such as innovation and technology. To secure long-term success and to support customer retention, we will not be afraid to move first to help secure the long-term future of dealer finance, no dealer benefits from choosing a lender with a model which proves unsustainable,” concludes Werner.