PCP set to be the new PPI scandal

PCP is set to be the new PPI scandal based on various mis-selling and sharp practices.

You could be owed compensation if you entered into a PCP finance agreement. The Financial Ombudsman Service received 11,452 complaints about car finance loans in 2022 – 2023 financial year. This is an 87% increase on the previous year and sits behind bank accounts and credit cards as the financial product that receives most complaints.

Third party claims firms account for 90% of all complaints.

PCP EXPLAINED

Personal Contract Plans (PCPs) are a popular and easy way to drive around in a new car (or a motorbike) for a small deposit. Relatively small monthly rental payments are linked to the depreciation of the asset that you will never own. This means that you are paying for the depreciating value of the car.

At the end of the term (usually 3 years), you have the option to buy the vehicle based on a ‘Guaranteed Minimum Value’ or roll part of that over as a deposit to get another new vehicle. The Guaranteed Minimum Value at the end of the PCP plan to purchase the vehicle is based on the projected value when you enter into the agreement, although this can often be more than the vehicle is eventually worth. This is known as the ‘balloon payment’.

It means that consumers can drive new cars and motorbikes for a fraction of the price they would pay if they were to buy one outright. This has resulted in the biggest change in car ownership over the past 20 years, resulting in people driving around in cars they can’t afford and will never own.

WHAT IS THE DIFFERENCE BETWEEN PERSONAL CONTRACT PLAN AND CONTRACT HIRE?

PCP is a purchase plan. Motorists have the option to buy the car at the end of the contract.

Personal Contract Hire (PCH) is a hire plan that can offer affordable monthly payments but you do not own the car at the end of the agreement. You never own the vehicle during the agreement and must return it when the agreement ends. It is simply a long term hire agreement.

PCP IN NUMBERS 

2009

New car finance: £5.83bn

Used car finance: £5.39bn

Total car finance: £11.22bn

2022

New car finance: £17.43bn

Used car finance: £22.2bn

Total car finance: £39.63bn

Average amount financed per new car has more than doubled between 2009 and end of June 2002 from under £12,000 to over £25,000.

Used car average amount financed has risen from slightly under £9,000 to over £15,500 in the same period.

Debt on new cars has more than doubled and used car finance debt has increased by 87% over the same period.

Wages have risen by 33% since 2009.

PCP AND AFFORDABILITY

PCPs work like mortgages. Motorists must pass an affordability check to enter into these finance agreements. Lenders use stress tests to test affordability, which have been fudged by sales staff over the years to complete sales. These stress tests will be shot now by the cost-of-living crisis.

Low interest rates linked to the Bank of England base rate led to motorists driving around in cars that they could never realistically afford.

Concerns are being raised that many people will be unable to afford to continue with PCPs as they face a perfect storm of high mortgage repayments, soaring energy bills, stagnant wages and sky-high inflation.

New and used car prices have also risen because of supply chain issues.

Various factors including Covid, Brexit and the ongoing Ukraine war have created a scenario that few could have foreseen. Consumers are facing a choice between keeping a house or a car, which many rely on to commute to / from work.

RECORD LEVELS OF DEBT

Concerns were growing in 2017 over the quality and stability of the car finance market, with record levels of debt being utilised to fund new cars. Car finance loans have been packaged up and sold to giant investment funds and pension providers on the securities market, which mirrors similarities to what triggered the global crash in America with home loans.

The Bank of England cited concerns warning borrowers were 10 times more likely to default on consumer credit than on their mortgages.

Claims management firms who have made millions from the PPI mis-selling scandal are looking at the way car loans have been sold, and people have reported cold calls from companies hoping to cash in on PCP claims.

The Financial Conduct Authority banned car sellers and brokers charging commission linked to the interest rate customers pay on car loans in January 2021. These commissions gave motor finance brokers and dealers an incentive to inflate customers’ finance costs. More expensive loans = larger commission. This was expected to save consumers £165m a year.

Car dealers and brokers have been required to disclose commissions received on loans sold. The Finance Conduct Authority cited in their 2019 report that they were not satisfied that all lenders were complying with FCA rules on assessing creditworthiness including affordability.

COMMISSION STRUCTURES

The FCA wanted to understand the different commission structures between lenders and dealers and incentives. Pre-contract disclosure and adequate explanations were found to be lacking, scant and potentially misleading.

Only 28% of brokers in a sample explained the total amount payable, the consequences arising from a failure to make payments under the agreement and the effect of withdrawing from the agreement.

Only 1 out of 37 franchised retailers, 4 of 60 independent retailers, 2 of 14 car supermarkets and 4 of 11 online brokers disclosed that a commission may be received for arranging finance.

As with PPI, sales commissions are often used to sell these contracts. It’s fair to say that there will be an element of mis-selling in this, given the sheer volume of these products being sold.

TYPES OF COMPLAINTS

The Financial Ombudsman Service have cited the most common complaints are:

• The car is faulty or not of satisfactory quality
• The car / car finance has been mis-sold or mis-described
• Unhappy about charges at the end of the finance agreement – excess mileage or damage charges
• The finance agreement was unaffordable or they were not treated fairly when they were in financial difficulties
• Consumers seeking to cancel their finance agreement early due to financial difficulties

HOW TO COMPLAIN ABOUT YOUR PCP AGREEMENT

Contact your finance provider or credit broker first. You need to give them the opportunity to put things right.

They have to give you a final response within eight weeks for most complaints. Request a deadlock letter and final decision if you are unhappy with their response so you can refer your complaint to the Financial Ombudsman Service.

You cannot take a complaint to the Financial Ombudsman Service until you have done this.

CAN YOU END PERSONAL CONTRACT HIRE EARLY?

It is possible to cancel contracts early. You must have already repaid 50% of the balance due including interest and other charges. This is called voluntary termination and is enshrined under the Consumer Credit Act 1974.

PCP AND ELECTRIC VEHICLES

Electric vehicles cost significantly more to buy than petrol or diesel equivalents, meaning that motorists will be taking on higher levels of debt to finance the switch.

CATCHES

There are catches and this is a bubble that is set to burst sooner or later. The sheer volume of cars that will eventually flood the second-hand car market will result in the collapse of used car vehicle prices. If and when that happens, drivers could lose their entire deposit to secure another vehicle.

Claims management firms believe this has not always been made clear.

They also believe that few car owners taking out a PCP were warned that they could pay a higher interest rate than a standard Hire Purchase (HP) agreement.

CLAIMS HANDLERS

It’s only a matter of time before the claims lawyers get their teeth in to this, which will result in repercussions far and wide within the car finance industry.

Whilst a PCP in itself can be an ideal solution for many car owners as it reduces monthly payments quite significantly, the crux of this lies with the way these products have been sold. Diesel cars form a big part of this.

I correctly predicted ‘rent to own’ firms becoming regulated in the same way as pay day companies, and my money is on this scandal blowing up sooner or later.

This will be an interesting one to watch.

FINALLY

You do not have to use a claims handler to lodge a PCP complaint with the Financial Ombudsman Service.

Just do it yourself and avoid unnecessary commission payments.

What are your thoughts on PCP car finance? Have you had any good / bad PCP experiences?