Industry commentators are suggesting that some firms authorised by the Financial Conduct Authority (FCA) to conduct credit activities related to motor finance could have to pay significant sums in compensation because of the way they have sold Personal Contract Plans (PCPs).
The FCA’s 2017/18 business plan identified the motor finance sector as an area of concern, commenting:
“We are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry. We will conduct an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance.”
Data from the trade association the Finance and Leasing Association suggests that 82% of car sales were financed using PCPs in the 12 months to March 2017, with this method of financing largely taking over from more traditional car loans such as leasing and hire purchase agreements. This means that over the year, 800,000 cars could have been purchased using PCPs, and it is also estimated that £40 million has been spent on PCPs since the FCA took over as consumer credit regulator three years ago.
PCPs combine elements from both leasing and hire purchase. The amount borrowed is equal to the expected depreciation in the car’s value over the term. A PCP usually has a term of between two and four years, after which the customer has three options:
• Hand the car back to the dealer
• Make a balloon payment and become the outright owner of the car
• Use any equity they have built up to purchase a new car
The amount of the balloon payment is equal to the finance provider’s estimate of the car’s value, allowing for depreciation. This estimate is made at the beginning of the loan term. If the car’s actual value at the end of the deal was £8,000 and the balloon payment was £7,000, the balance of £1,000 could be used as equity towards the purchase of a new car via the same finance provider.
The main concerns regarding firms’ activities are the lack of adequate affordability assessments on PCP applications, the higher interest payments on PCPs when compared to hire purchase, and also whether firms have been overstating the likelihood of a customer being able to build up equity over the term of the plan.
It’s not hard to see echoes of the payment protection insurance (PPI) mis-selling scandal here. Stories regarding PCPs are becoming more common in the media, there has been a rapid increase in the volume of PCPs being sold, and the plans have been sold by firms whose main specialism is not financial services and who may therefore lack financial know-how. (Although much of the media coverage of PPI has centred on mis-selling by banks, firms such as retailers, catalogue shopping companies and motor dealerships were all very much involved in PPI mis-selling).
Graham Hill, board member and car finance expert at the National Association of Commercial Finance Brokers, said that “the car finance industry could be shaken to its roots” over this issue. Mr Hill added:
“While the PCP in itself can be an appropriate solution for many car owners, as it reduces the monthly payments quite significantly, the issue lies with the way these products have been sold.
“Were people made aware of the increased interest rate charges on PCPs relative to hire purchase agreements?
“A significant number of consumers and business owners could be in for a sizeable cash windfall from the cars, motorcycles and vans they have purchased.”
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.