The FCA has launched a review into the car finance market driven largely by concerns arising from the increase in the use of Personal Contract Purchase (also known as Personal Contract Plans).
Today, just under 90% of new cars are bought on finance, with PCP being the most popular option.
What is a Personal Contract Purchase? (PCP)
PCPs allow buyers to effectively lease a new car for 3-4 years as opposed to paying for the car outright, after which they have the option to either hand the car back, pay a ‘balloon’ payment to own the car or arrange finance on a new vehicle. PCPs are similar to other forms of car finance but in effect the customer is not funding the purchase of the car but paying for the depreciation of the car as against a Guaranteed Future Value. Customers are attracted by the possibility of using the equity in a car to acquire a new car after the expiry of the finance term under a new PCP. A high GFV enable the dealer to offer lower monthly payments (in addition to the initial deposit). However, how the GFV is not set and there can be substantial charges for exceeding annual mileage allowances and other factors which can mean that the actual value of the car is less than the GFV, meaning that equity in the car is less than anticipated.
This reliance on credit to fund car purchases has sparked fears that an economic downturn could lead to mass defaults and repossessions.
FCA Investigation
The FCA has expressed concerns about “a lack of transparency, potential conflicts of interest and irresponsible lending” in the motor finance industry. The review 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.”
The FCA has also made it clear that it considers the issue is not simply one of affordability. It is reviewing “whether consumers are able to compare and choose effectively between financing options. The range of products available means that consumers’ choices are not always straightforward and they may have to take account of a number of variables in order to determine the most suitable product for their circumstances. These variables will depend on their attitude towards ownership of the vehicle at the end of the contract and the amount they want to pay on a monthly basis”.
Similar reviews into products such as PPI have subsequently escalated into major mis-selling scandals and given rise to an entire industry sector focussed on compensation claims for mis-sold policies, even when the individual claim or loss suffered by a consumer is relatively modest. Banks and retailers who sold PPI have been investigated, fined and ordered to reimburse consumers.
The implications of PCP mis-selling are significant. Going forward, consumers contemplating a PCP should consider the range of financing options that are available and ask the dealer to explain these in detail and provide comparisons.
Dealers also need to conduct their own reviews to ensure that their sales processes are robust, that staff are properly trained and not incentivised to promote PCPs over other alternatives and that as businesses they are focussed on achieving good consumer outcomes. Where such a review is done and it raises issues to be addressed it may be necessary for dealers to undertake past business reviews to identify sales that might be unsuitable – irrespective of whether a consumer has raised a complaint – with a view to taking remedial action. Whilst commercially this will be unattractive it may avoid far greater pain in the future.
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