Bank of England supervisory body stops short of launching tighter controls on consumer lenders but calls on firms to up their standards

 
Lucy White
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The PRA has called on a number of consumer lending institutions to respond to their concerns (Source: Getty)

A supervisory branch of the Bank of England has stopped short of launching tighter controls on consumer lenders but is calling on firms to up their standards, its review published today reveals.

The Prudential Regulation Authority (PRA) has found that, although there has not been a huge drop in lending standards, the resilience of consumer credit portfolios is reducing as consumer lending is booming.

Read more: No let up in consumer credit growth as the Bank of England eyes risky lending

This has prompted the PRA to call on a number of consumer lending institutions to respond to their concerns, providing evidence of how they are addressing risks.

In a review of 20 large firms, the PRA was troubled that they were overly reliant on the current benign macroeconomic environment in their risk assessments and were not factoring in what might happen to consumer loans in times of stress.

They also found that lending was becoming less resilient — the average pricing of loans (the annual percentage rate, or how much a consumer is charged for borrowing) was dropping and the average risk-weights (or how much capital a bank must hold to cover liabilities arising under the loans) had fallen by around 10 per cent.

By September, the PRA expects all the firms to which it sends the review to prove compliance with a number of requirements.

These include adequate credit scoring, stress testing which looks beyond the current historically low point-in-time arrears rates, and taking into account a borrower’s total debt.

Where a borrower is on the borderline of being approved for a loan, the PRA also recommended that a “prudent add-on” be used — adding an incremental amount of loss to that predicted, so a marginal business could still be profitable in the event of a downturn.

This was currently only being done by “some firms”, according to the authority's review.

Lending institutions should also address their governance framework, the PRA advised, so boards remain satisfied that there is no drift in quality or controls.

Read more: Bank of England requires banks to hold extra £11.4bn in capital as it warns of pockets of risk in the UK economy

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