U.K.'s Finance Watchdog Looks to U.S. for Help on Auto Loan Boom

(Bloomberg) -- Andrew Bailey, the head of the U.K.’s top financial watchdog, is looking to his U.S. counterparts for help getting a grip on a consumer lending boom that’s raising alarm bells at the Bank of England.

Britain’s Financial Conduct Authority is studying a “long-term structural shift” in U.K. car finance, which is “quite a big part of the story” behind the rapid growth in household borrowing, the agency’s chief executive officer said on the sidelines of a British Bankers’ Association conference in London on Thursday.

Bank of England Governor Mark Carney moved on Tuesday to increase capital requirements for U.K. lenders by 11.4 billion pounds ($14.8 billion) in part to tackle risks posed by the recent growth in consumer credit. In a change in vehicle buying, Bailey said British consumers are increasingly following the U.S. by financing car purchases with loans secured against their vehicles.

“It has become more like the U.S. market, more like a secured-finance market than it has in the past," Bailey said. The FCA chief said he is having “quite a lot of talks with the U.S. regulators, they’ve had longer experience of this.”

Car finance has grown at an annual rate of about 20 percent since 2012, and represented almost a third of the U.K.’s 198 billion-pound consumer credit market at the end of April, according to the BOE. But banks accounted for 24 billion pounds of loans to buy vehicles while non-banks contributed 34 billion pounds, indicating that traditional lenders are only part of the issue.

“If the Bank of England brought in some draconian form of tightening to constrain banks’ ability to lend in this market, you’d expect their market share to fall,” said Ian Gordon, an analyst at Investec in London. “Whether or not that would be a good thing would be debatable given the lack of oversight over other lenders.”

Subsidiaries of global car manufacturers such as Germany’s Volkswagen AG and Bayerische Motoren Werke AG offer financing in the U.K. market. On average, about half of the debt funding of carmakers’ lending units comes from their parent companies, while a quarter comes from loan securitization and the remainder from bank lending, according to the BOE.

To contact the reporter on this story: Richard Partington in London at rpartington@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Jon Menon, Christian Baumgaertel