In a move that will undoubtedly be welcomed by motorists, the Financial Conduct Authority has acted to remove the infrastructure that allows some car dealers and brokers to charge long-maligned interest rates on vehicle purchases.
As the UKs financial watchdog, the FCA, is responsible for protecting and championing consumer rights. Imperative to protecting consumers, safeguarding market integrity and promoting healthy competition across all financial markets, FCA controlled functions promote equality, impartiality and transparency with confident, consumer-focused regulation.
Calls for an outright ban follows a two-year investigation of the UKs motor credit market, which was announced by the FCA earlier this year. Under new proposals, the transparency of vehicle purchasing will be addressed, with buyers being fully aware of every aspect of payment structure prior to signing on the dotted line.
Moreover, in keeping with fair consumer FCA compliance, the review highlighted how Difference in Charges (DiC) and scaled commission models the FCA meant consumers have been paying significantly more for their motor finance. This was found to be a direct consequence of the way lenders chose to remunerate their brokers.
The FCA’s Standpoint
According to the FCA, by eradicating ‘flexible’ commissions with unfavourable consumer terms and conditions, alongside a more rigid approach to car finance will remove incentive for brokers to charge consumers usurious interest fees to augment their own commission.
This was highlighted by an article on Confused.com published in March, 2019. Just last year a mystery shopping research exercise discovered that just one of thirty-seven franchised dealers, four of sixty independent retailers, two of fourteen car supermarkets and four of eleven online brokers effectively communicated that a commission would be received for arranging vehicle finance.
It has been concluded that from this point forward, all vehicle finance must state how any commission arrangements entered by the consumer and a vehicle finance company will affect the price of vehicle payments.
The FCA has long been concerned with the way that commission arrangements have been operating in the motor finance sector. They have held the opinion that this may be leading to consumer harm on a potentially significant scale.
It has been concluded that consumers are paying as much as £1000 extra on vehicle finance plans. How is this possible? Well, lenders and brokers have been allowed to set their own interest rates. This is a business model that the FCA has deemed detrimental to consumers as lenders have been allowed to set their own interest rates with dereliction.
FCA compliance in matters relating to motor finance has spearheaded a proposed move that’s now involved in a consultation period until January 15th, 2020 ahead of a proposed implementation of the changes in Q2, 2020.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said, ‘We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance.’
He continued, ‘By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.’
It’s clear that appropriate steps are being taking by the regulator to safeguard the interests of consumers seeking car finance and to effectively regulate finance lenders and brokers.
How Car Finance Works
When purchasing a car, finding the right financial agreement can be challenging. There are a handful of payment options, offering consumers different purchasing options based on their personal and financial circumstances. FCA’s car financing crackdown will regulate how interest and therefore commission rates are set.
Personal Contract Purchase (PCP)
A personal contract purchase gives consumers the ability to purchase a new vehicle in return for an initial deposit and agreed upon series of monthly payments, with the interest and commission prices factored in. PCP is basically a leasing agreement. Consumers never own the vehicle and are required to return it to the dealer once the contract has been fulfilled.
The amount consumers pay per month is dependent on the size of the deposit, the cost of the car, the interest rate and how much the dealer anticipates they’ll be able to sell the car for when the contract is completed. This amount is frequently referred to as the Guaranteed Minimum Future Value (GMFV) or what the car is expected to be worth after the finance period has elapsed.
Consumers who wish to keep the vehicle have the option to buy it outright in return for a final payment, sometimes called a ‘balloon’ payment. A PCP contract will detail the condition the lender expects the vehicle to be returned in. Consumers are liable for paying for significant damage if the vehicle is damaged beyond traditional wear and tear. Additionally, vehicles returned with significant miles on the clock will also face penalties.
The most apt way to describe a hire purchase agreement is to say that it’s like taking out a mortgage on a house. Once consumers have paid an initial deposit, a finance company will loan you the cost of purchasing the vehicle that you’ll agree to repay in monthly instalments over an agreed period.
The amount of the deposit and agreed monthly payment structure will be defined by the cost of the car, the interest rate (APR) and the length of the agreement.
Unlike PCP, consumers are not liable for a large balloon payment because once the final payments have been made, the vehicle is owned outright. Unlike PCP, HP agreements don’t include any terms and conditions regarding mileage or general wear and tear.
Personal Contract Hire (Leasing)
Leasing a car is like hiring a car when you travel abroad. Consumers pay an upfront amount the commit to making regular payments over an agreed period (typically 24-48 months.) Effectively personal contract hire is long-term car rental. There’s no opportunity to purchase the car, nor are consumers ever afforded the opportunity to buy the car outright.
As with other forms of car finance, consumers will have to pay for an initial rental cost, but unlike PCP or HP agreements, personal contract hire tends to be more rigid and is usually calculated as a multiple of three, six or nine monthly payments. Additional maintenance plans can also be added to personal contract hire, though this will increase your monthly payments.
An attractive option for many consumers, taking out a bank loan is a straightforward way to buy a car. Why? Consumers don’t have to be concerned with the terms and conditions associated with different types of finance deals or having to limit yearly mileage or returning the vehicle once the contract has expired. Choosing to finance the purchase of a new vehicle means that consumers own the vehicle outright and are therefore not limited to keeping the vehicle for a contracted period.
The integrity of each of these vehicle purchasing models have been thoroughly scrutinised by FCA compliance investigations and deemed to be subject to possible lender manipulation. With the new introduction of new regulations however, unethical financial practices will not go-on unabated.
Praise by Industry Leading Professionals
The changes proposed by the FCA have been welcomed by those in the automotive sector. Adrian Daily, Head of Motor Finance at the Finance & Leasing Association stated that this was ‘good news for the industry and consumers, as it delivers clear rules and a consistent approach to commissions.’
He added, ‘Many lenders have already moved to the commission models that the FCA is proposing (which is) a clear indication that finance companies place consumer value at the forefront of their thinking.’
James Fairclough, Chief Executive of AA Cars, said, ‘The FCA has concluded, quite rightly, that there is no inherent problem with car finance products themselves.’
He goes on to say, ‘However customers are poorly served if they are not shown all the options best suited to them, whether through a lack of transparency, deliberate misinformation or because brokers are trying to steer them toward a particular product purely in order to secure a discretionary commission.
Transparency and clarity are essential for the car finance industry to promote (consumer confidence) and the FCA’s proposal would make it easier for car buyers to compare different deals and shop around.
He concludes, ‘It could also bring the price of finance down if it triggers greater competition on interest rates between lenders and removes the distorting effect of discretionary broker commission.’
It’s clear that the FCA has taken steps to combat unfair – and some may argue – unscrupulous – vehicle finance lending practices. The proposed changes will apply to vehicle finance lenders and brokers, not just those selling motor finance. Final rules will be published later in 2020 at which time vehicle finance will be more transparent than ever before.
Scott Robert is one of the leading authorities on all issues related to FCA compliance in Manchester – or any other location in the UK. If you’d like help with any issues regarding car financing compliance, FCA or data compliance, take the time to browse our website