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We are getting close to the day when the new Financial Conduct Authority (FCA) takes over from the Office of Fair Trading (OFT) and launches its new guidelines to the finance industry. The new rules will affect all parties involved in ‘consumer’ finance. At one end of the spectrum the new rules will affect consumers as well as non limited SME’s such as sole traders and small partnerships, in the same way as the Consumer Credit Act covers these entities at present.

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The rules will also affect every provider of ‘consumer’ finance. In the motor trade that will include the finance organisations as well as dealers, brokers and introducers such as accountants and IFA’s, all will be affected by the new rules which will come into force from the beginning of April 2014.

For those currently providing advice they should have applied and paid for ‘Interim Permission’ that keeps their Consumer Credit Licence active whilst the changes are introduced. If, whoever you are dealing with, doesn’t have interim permission they are trading outside the law. The problem is that we don’t yet know exactly what the rules will be, making it impossible to prepare for them.

One thing is for certain, we will have much stronger controls imposed upon applicants for finance to prove that they can afford the repayments. This raises two issues, the first goes to the core of the credit industry which is down to the judgement of the underwriter. The word affordability is used in the proposed regulations but what does it mean.

We are told that applicants will have to provide some form of affordability proof. This is likely to be an income and expenditure statement. But if you take a person who can demonstrate income of £1,000 per month with expenditure of £1,001,including his vehicle costs, does this mean that he fails the affordability test?

He is hardly likely to pop to the pub for a pint if it means he can’t afford the repayment on his car which he needs to get to work in the first place to earn his £1,000 per month. So it will be interesting to see how this pans out and what additional pressures are placed on those providing and wanting finance.

It is a bizarre situation when someone else has to tell me if I can afford a repayment on a car or not. Personally I would die of starvation before I would give up my car through non payment of the monthly lease. Which brings us to the next point. After carrying out a more substantial test on applicants for finance it is reasonable to assume that far fewer applicants will receive credit approval, otherwise what would be the purpose of the massive investment and the changes to legislation?

So let’s think about that. I have a client who applies for finance on a Ford Fiesta at a prime rate of £150 + VAT per month. Unfortunately he fails the affordability test so he is now forced to go down the path of sub prime lenders. The current rate is around £295 + VAT per month for the same car.

But the sub prime lender must surely apply the same affordability test or is it a little less stringent – in which case it defeats the objectives of making sure the client can afford to make the repayments in the first place. By making sure he isn’t offered finance at £150 per month how on earth is he likely to be able to make payments at twice the rate?

The whole thing is starting to look like a farce but very worrying at the same time. The only advice I would give at this stage is that if you are looking to change your car this year do it before April you could give yourself an awfiul lot of work and be badly disappointed! Watch this space. By Graham Hill