Britain’s lenders have been warned again to take more care over the quality of their consumer credit loan books or face a crackdown.
The Prudential Regulatory Authority cautioned that lending for consumer credit – cars, personal finance and credit cards – had become too relaxed due to the low debt write-off performance recently.
It has asked the UK’s top lenders to provide evidence that they have adequately allowed for risks in a downturn, factored in loss-leaders and promotions; been prudent with default rate estimates and allowed for a borrower’s total debt when granting a loan.
In addition, the PRA has asked for assurances on the current crop of products, in particular the growth of 0% credit cards and the fact they might be masking people in financial difficulty; tumbling rates for personal loans and soaring guarantees for motor finance lenders.
As an area of concern, it pointed to vehicle finance exposure of about £23bn across the industry with finance deals in a range of 85-95% of the vehicle’s expected future value.
Bank shares reacted calmly with shares in Lloyds Banking Group PLC (LON:LLOY) up 0.5% to 67.05p, Royal Bank of Scotland PLC (LON:RBS) up 0.5% to 256.9p and Barclays PLC (LON:BARC) 0.3% higher to 207.7p.
That may have been because concerns over consumer credit were flagged last week in the twice yearly Financial Stability Report, where the Bank of England highlighted in particular the worry that, unlike mortgages, a slump in consumer credit market would lead to widespread debt write-offs.
To counter that, the Bank raised the counter-cyclical buffer for consumer credit lending to 0.5% from zero and brought forward the next round of stress tests by six months.
Sub-prime lenders meanwhile face scrutiny from the Financial Conduct Authority, which has launched a crackdown on poor practice in the consumer credit business.