Personal Contract Purchase (PCP) plans accounted for one in five new car purchases in 2006. Now they finance almost four in five (Chart 13). At the aggregate level, PCP is the new cash purchase. The Financial Conduct Authority, which regulates car finance, has expressed its concerns about a lack of transparency, potential conflicts of interest and irresponsible lending in parts of the car finance industry. It will explore and address those practices. 9  The Bank of England’s role is to manage any risks to the wider economy from this growth. And those should be kept in perspective. On average, those taking out PCP plans tend to have higher incomes and more savings than the population as a whole. 70% of PCP borrowers have above average income (Chart 14). Arrears rates on banks’ car finance deals are lower than on other forms of consumer credit. Moreover, the true burden of car finance to households overall is much lower than it seems at first glance. 9  Financial Conduct Authority (2017) ‘Business Plan 2017/18’. https://www.fca.org.uk/publication/business-plans/business-plan-201718.pdf 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  PCP plans commit the car buyer to around three years of fixed monthly payments with an option - not an obligation - to make a final balloon payment at the end of that period, to own the car outright (Chart 15). If those optional balloon payments are excluded, this car finance debt accounts for only 1.2% of aggregate household income.
Many countries, not least my own, have had bitter and expensive experiences from this. Of course, all countries have specific national features in their banking systems. The main risks are common all over the world, however, and the same challenges to supervision seem to appear everywhere. I will focus on some important issues seen from my perspective, which includes the experiences we gained during the Swedish banking crisis in the early nineties. Deregulation Why deregulate if the consequences may be so dangerous? The obvious answer is that regulations tend to create inefficiency and prevent the domestic banking system from developing in response to international competition. The long run cost to society of extensive regulations is a poorly functioning financial sector. While regulations are usually put in place to decrease systemic risk they may indeed in the long run do quite the opposite. Strong regulations mean that banks have low incentives to adopt good credit policies and risk management techniques. Supervision tends to be excessively formal, focusing on formalities rather than on actual risks. Nor are the regulations and techniques of supervision updated often enough to foster the development of new activities and management of risks. Regulations shelter the domestic banking industry from outside influence, which slowly tends to decrease efficiency and increase systemic risk. Furthermore, in a regulated environment the likelihood is large that some credits may be subsidised, perhaps even channelled to politically desirable rather than economically sound projects, leading to misallocation of resources.