The Prudential Regulation Authority (PRA) has published a statement summarising the findings of its recent review of the consumer credit industry and is going to request a response to the statement by firms with material exposures to consumer credit.

The PRA is concerned that the resilience of consumer credit portfolios is reducing due to a 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.

The review highlighted the following concerns:

  1. Firms’ assessment and pricing for risk appeared to be overly-influenced by the current benign macroeconomic and historically low arrears rates;
  2. Rising consumer indebtedness and its impact on borrowers’ ability to repay their debt in the future was not always fully considered in firms’ assessment of risk;
  3. At the cut-off point for new business, only some firms incorporated a ‘prudent add-on’;
  4. Risk management and controls for consumer credit products varied considerably between firms, as did management information.

As regards product-specific risks, the PRA have expressed concern with credit card models dependent on 0% promotional offers. In particular the PRA is concerned about delayed recognition of credit losses for these products.

The PRA is also concerned with the significant of growth of Personal Contract Plan (PCP) motor finance which may lead to an increase in lender risk exposure as a result of Guaranteed Future Values.

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.

See the full statement here: PRA statement on consumer credit