June 29, 2017 / 11:46 AM / a year ago

UPDATE 1-UK financial watchdog taking close look at auto finance

(Adds more details)

By Huw Jones

LONDON, June 29 (Reuters) - Britain’s financial watchdog is taking a close look at lending practices in the fast-growing car financing sector, and has sought advice from U.S. regulators, the chief executive of the Financial Conduct Authority said on Thursday.

Andrew Bailey said the starting point was whether there has been a structural change in how people buy and sell cars in Britain and what this means.

“My hunch is there has been. It has become more like the U.S. market,” Bailey told reporters. “It has become more of a secured finance market than it was in the past.”

In recent rapid growth in consumer credit, which the Bank of England again highlighted this week, cars were “quite a big part of the story”, Bailey said.

The FCA has been in “quite a lot of talks” with U.S. regulators because they have longer experience of the auto financing market, he added.

The BoE’s latest Financial Stability Report published this week said consumer credit has been growing much faster than household incomes in recent years. Car finance offered by dealers has seen the fastest growth, making up 30 percent of credit.

Under “personal contract purchases”, the customer pays a fraction of the car’s price as a deposit, and then pays regular monthly instalments, with the ability to buy the car at a price agreed at the start. The guaranteed price is typically used to buy a new car, thus ensuring a continuous demand for vehicles.

Dealership finance, mainly provided by units of global car makers, has seen an average annual growth rate of around 20 percent since 2012, the BoE report said. Around 85 percent of new car purchases used dealership finance in 2016, compared with about half in 2009, the BoE report said.

Bailey said there was a need to look at the link between the value of the car and borrowing.

“If you talked to U.S. bankers on this, they’ll tell you stories about what worked and didn’t work in the U.S.”

“You have to look at the conduct that’s going on in the terms of how the lending is being advanced to people and what they understand about it,” Bailey said.

The BoE said in March that its banking supervisory arm was also reviewing credit quality in new lending in dealership car finance.

Reporting by Huw Jones; editing by Jason Neely and Susan Fenton

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