THE consumer credit market is facing major changes – and an increase in interest rates is now firmly on the cards, according to Karl Werner, CEO of the motor division of MotoNovo Finance.
Reflecting on the latest Bank of England financial policy committee (FPC) statement, Werner said: ‘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.’
In its statement, the Bank of England indicated that lenders are at risk of underestimating the impact of a rise in consumer defaults in an economic downturn.
It said: ‘Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit.
‘Although the overall 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.’
The Bank of England estimates that in a severe downturn, UK banks could incur losses of £30 billion.
Werner observed: ‘The winds of change in consumer credit have been building for a while now; it is time to recalibrate 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.’
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