Car Finance - A New PPI Scandal?
- BetterAskAdam.com
- Jan 14, 2024
- 3 min read
Updated: Jan 15, 2024
The UK finance watchdog, the FCA, is investigating the car loan market following concerns that people who bought cars were not treated fairly. It is early days, but if the FCA finds large scale wrongdoing, it could trigger payouts to potentially millions of car buyers.
The investigation stems from a decision by another regulator, The Financial Ombudsman, which says it has received over 10,000 complaints and has now resolved 2 of them. In fact - motor finance now accounts for 25% of all the cases sent to the Financial Ombudsman.
The investigation centres around concerns that dealers were incentivised to give customers worse deals by offering dealers higher commissions if they charged more to the customer. This practice has been banned since 2021, but the Financial Ombudsman Service, says it's heard from more than 10,000 people who fear they were overcharged. The FOS has also recently ruled in favour of two consumers on the issue, and it's that ruling which has prompted the Financial Conduct Authority's investigation. [1]
Around 80% of new cars you see on the road every day have been bought via a loan known as a Personal Contract Purchase (PCP).[2]
In the two decisions the Financial Ombudsman upheld, they found, in very general terms, that the consumers were not aware that the car dealer had the ability to set the interest rate on their car loan, and would earn more commission from the lender the higher the interest rate they chose. That led to the consumer paying more than they could have done.
In another decision, also just published, they did not uphold the complaint. This was a case involving fixed-fee commission, where the car dealer had no discretion to vary the interest rate, and therefore the commission paid was a fixed amount, which was disclosed to the consumer.
Discretionary Commission Arrangements
In very broad terms, this is about what’s called ‘discretionary commission arrangements’. So when someone buys a car, in some cases the lender gave the car dealer the ability to set the interest rate on the borrowing, which is called a discretionary commission arrangement. Often, this means that the higher the interest rate set, the more commission the car dealer would receive. The interest rate was therefore sometimes set at a higher rate than the consumer could otherwise had got.
The role of the Financial Ombudsman Service is to investigate individual complaints, and in mid January it published two decisions in cases involving complaints about discretionary commission arrangements. They found the arrangements to have been unfair.
The Financial Conduct Authority, which looks at more structural issues in the finance industry, banned discretionary commission arrangements in 2021. There are various other types of motor finance commission arrangements – a wide variety, which is why this is such a complex area. But one other common arrangement are fixed or flat fee arrangements. In those, the dealer does not have the ability to change the interest rate offered in order to generate a higher commission for themselves. The FCA’s ban was on discretionary commission arrangements only.
The FCA’s announcement was that they were investigating how businesses are handling complaints about motor finance commission, rather than investigating motor finance commission itself.
How PCPs Work
A Personal Contract Purchase (PCP) is a loan designed to buy a car. But you don't pay off the full value of the car and most importantly to understand, you won't automatically own it at the end of the deal.
You can own the car, if you choose to make an extra payment at the end of the loan agreement period, called a balloon payment.
So the PCP is made up of 3 elements:
The deposit (usually about 10% of the price).
The amount you borrow.
The balloon payment, if you want to on the car, although you don't have to pay this if you hand the car back.
Importantly, even if you hand the car back, you will still have paid interest on the full loan amount over the three-year period, and the finance company remains the owner throughout the term of the PCP agreement.
Typical APR rates vary from around 4-7% but can be as high as 20%, particularly on used cars. If you’re offered a low or 0% deal, then make sure you check whether that money is being made back by the dealer in a higher initial deposit or final payment.[3]
PCP Vs HP
A conventional hire purchase agreement divides the total amount borrowed into equal monthly payments, usually over three or four years and you pay back the full amount of the loan and interest over the agree period. However, a Personal Contract Purchase involves a series of smaller monthly payments, with an optional larger payment at the end of the agreement - the bloom payment. A PCP deal means you don't have to pay the full value off the loan back, but then you won't own the car.
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