British banks face an expensive motor finance crash

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Giving dealers incentives to increase loan interest rates for car buyers could be ruinous for lenders

When the US economist George Akerlof wrote his Nobel Prize-winning paper on the problem of information asymmetry in business in 1970, his leading example was used car dealers. Akerlof noted that it was impossible for a buyer to grasp whether a car they were being offered was a bargain or a dud. Only the dealer knew. Time has passed but some things do not change. Substitute “used car finance deal” for “used car” and this summarises the scandal that has emerged in the UK motor finance industry.

If you can follow a regulator’s code of conduct but remain exposed to mis-selling claims, running a consumer credit business is hazardous. That said, many dealers were not obeying these regulations in practice, let alone meeting the higher standard the court has laid out. Remarkably few were complying before 2021, judging by a survey the FCA carried out at the time.

 

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