LONDON -- The UK's Financial Conduct Authority (FCA) is investigating whether companies are properly assessing whether customers can afford to buy the car they are offered on credit.
The moves comes amid concerns over such sales as the UK new-car sales fall and interest rates rise.
Most Britons buy a new car using a Personal Contract Plan (PCP), which typically allows them to make monthly payments over three years and then trade in for a new model, with their old vehicle going onto the used market.
The FCA said that some commission arrangements could incentivize dealers to arrange more expensive finance for customers, and that in some cases consumers aren’t getting “key information in an accessible manner.”
The Bank of England estimated last year that dealership car finance had grown at an average rate of about 20 percent a year since 2012, an increase of more than 30 billion pounds ($42 billion).
Some analysts are questioning how the residual values of diesel cars can be maintained as they come under pressure due to bans, levies and other regulatory crackdowns around the world.
"A small shock can be absorbed very well by everybody, but there is the potential for it to be worse or massively worse" said Philip Rush, chief economist at Heteronomics in London. "There is risk of complacency."
New-car sales in the UK fell 2.8 percent in February, the eleventh successive monthly decline as consumer confidence and uncertainty over the future of diesel hit demand.
The impairment charge at the UK motor-finance division at Lloyds Banking Group, the lender with one of the biggest exposures to the British car market, rose 48 percent last year to 111 million pounds, driven by loan growth and provisions for residual value risks, the lender said in its annual report.
Signs of stress in the market were also seen at MotoNovo, the UK vehicle funding arm of the South African bank FirstRand, where nonperforming loan provisions increased by 29 percent.
In interim findings released on Thursday, the FCA said the growth in motor finance had been strongest among customers with better credit ratings and that arrears and defaults remained low, although they had risen slightly in recent years. However, it will continue its work in three areas: whether firms are properly assessing customers, especially those with low credit scores, the risk around commission arrangements for dealers and if the detail provided to customers allows for informed decision-making.
"We are undertaking further work on responsible lending, particularly the approach taken by motor finance lenders to assessment of creditworthiness," the FCA said. "Our work will be primarily... focused on assessments for higher credit risk consumers."
The FCA expects to complete its review by the end of September.
Bloomberg contributed to this report