UK banks told to justify consumer credit as risks mount

LONDON • The Bank of England (BoE) told UK banks to prove that their policies on credit cards, personal loans and other types of consumer lending won’t leave them weaker in a downturn.

The BoE’s Prudential Regulation Authority (PRA) said yesterday that firms need to show that they’re not underestimating the risks of consumer credit given the current “benign economic environment”.

“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,” the supervisor said in a statement.

While consumer credit makes up less than 10% of UK banks’ lending to individuals and non-financial companies, it’s far more volatile than mortgages, with total writeoffs 10 times higher since 2007, according to the BoE. Consumer credit has been growing at more than 10% a year, much faster than household incomes and mortgages, the central bank said. For comparison,

loans to firms grew by 2.9%. To help restrain potential risks from this credit boom, banks must show that their consumer lending isn’t based on excessively optimistic assumptions, the PRA said in presenting the results of a review of firms’ asset quality

and underwriting practices. This means their credit-scoring should adequately capture medium-term risk, and their stress-testing mustn’t “underestimate potential downturn risk”, the supervisor said.
The UK Financial Conduct Authority (FCA) also weighed in on consumer credit yesterday with proposals for how firms should manage risks related to how they pay staff and manage performance.

“The way firms pay and manage the performance of their staff is a key driver of culture and customer outcomes, and a continuing priority for the FCA,” said Jonathan Davidson, the supervisor’s ED of supervision — retail and authorisation.

For 0% interest credit card offers, the PRA told firms to justify the “assumptions and time periods used for forecasting the net present value of new business”.

Banks should take into account customers’ “motivation for borrowing” and total indebtedness when issuing unsecured personal loans, the PRA said.

For motor finance, which accounts for 30% of consumer credit, guaranteed future values “should be set in a prudent manner compared to the expected future value of the car”, it said.

The PRA told banks to measure the “impact on financial performance and capital from a fall in used car prices” and share the results with the supervisor. — Bloomberg