The Prudential Regulation Authority (PRA) has undertaken a review of consumer credit lending, examining PRA-regulated firms’ asset quality and underwriting practices for credit cards, unsecured personal loans and motor finance.
This follows a continued period of material growth in consumer credit, a lowering of pricing and extensions of interest-free offers. The Financial Policy Committee’s (FPC) June 2017 Financial Stability Report assessed the risks to financial stability from these developments.
PRA supervisors will write to firms with material exposures to consumer credit with a request to respond to this Statement. Firms’ responses, together with the results of the 2017 stress-testing exercises, will inform firm-specific supervisory action by the PRA and system-wide policy decisions by the FPC.
Relevant information will be shared with the Financial Conduct Authority (FCA), and this Statement should be read in conjunction with the FCA’s forthcoming consultation on its Consumer Credit Sourcebook (CONC).
The PRA Review found that, in an environment of rapid growth in consumer credit, interest margins have fallen and there was evidence of weakness in some aspects of underwriting, so lenders are more vulnerable to losses in stress.
Overall, the PRA judges that the resilience of consumer credit portfolios is reducing, due to the combination of continued growth, lower pricing, falling average risk-weights (for firms using internal-ratings based models), and some increased lending into higher-risk segments.
While the PRA Review did not find evidence that the growth in consumer credit in recent years has been primarily driven by a material lowering of credit policies or scoring, the aggregate growth plans of PRA-regulated firms may only be achievable with some loosening in underwriting standards, or further reductions in pricing, notwithstanding a likely ‘optimism-bias’ in firms’ business-plan projections (8% per annum aggregate growth over three years for personal loans; 4% for credit cards; 5% for car finance). Moreover, the short maturities of consumer credit mean that the asset quality of the stock of lending can deteriorate quickly.