In a recent investigation, the Financial Conduct Authority (FCA) has found that high interest rates in car deals could be costing customers £300,000 million per year. Customers are being overcharged when signing up for personal contract purchase (PCP) plans, where the car retailer also acts as the broker. It's estimated that many customers are being overcharged by more than £1,000 on their car deals without realising.
PCP finance vs. other car payment options
PCP plans are currently the most popular financing method for car buyers. With a PCP plan, you pay an upfront deposit, followed by monthly payments. This is similar to a hiring plan (HP) but the monthly payments are lower. This makes premium vehicles more accessible than they would be through a traditional car loan.
There are two important differences between a PCP and a traditional car loan from a bank. The first is that the customer doesn't own the car at the end of the deal. If you wish to buy the car after your period of monthly payments, you'll need to pay an optional final payment, also known as a "balloon payment". The second important difference is that with PCPs, the car dealer also acts as the financial broker.
They are the ones to calculate the deal, including the interest rate. Charging a higher interest rate results in a larger commission for the seller, creating a conflict of interest that many customers aren't aware of when they agree to a deal.
Customers overcharged by more than £1,000
The FCA released a report showing widespread mis-selling of PCP car deals, with many retailers not giving their customers all the facts required to make an informed decision. Many sellers were not acknowledging that they received commission for the deals, or that the commission was directly linked to the interest rates they were setting.
In order to gather accurate information about PCP practices, the FCA sent mystery shoppers to 122 motor retailers. Their investigation found the following:
• Only 31% of brokers explained that PCP customers do not own the car until all sums (including a balloon payment) have been paid.
• Just 28% of brokers disclosed the total amount payable and explained the consequences of a missed payment or agreement withdrawal.
• Out of 112 retailers, only 11 told the customer that a commission may be received for arranging the deal.
• On a typical motor finance agreement of £10,000, a customer may be charged £1,100 more in interest through a PCP than through a different financing plan.
How do the FCA plan to address the issue?
The FCA estimate that mis-sold PCP car deals are costing consumers £300 million annually. They have published a public report outlining the findings of their investigation and will be bringing it to the attention of relevant trade bodies so industry-wide action can be taken.
They'll also be following up with individual firms who didn't meet FCA standards when investigated. They "may consider supervisory or enforcement action" where necessary to make sure that dealers follow through with changes to their practices.
One of the FCA's biggest concerns is the commission arrangements that many retailers have. To combat this, they're working on policy changes that would affect commission structures and ensure that customers are better informed before signing an agreement. The FCA will be reviewing PCP commission models and are currently considering limiting or banning them in order to prevent further mis-selling.
If you believe you may have been mis-sold a PCP car deal, call one of our experts on 0808 301 8545 or email firstname.lastname@example.org. Alternatively, you can enter your details in the form at the top right and we'll call you back.