PCP Car Finance Deals Could Become A New Mis-Selling Scandal

Originally published by Out-Law.com

ANALYSIS: Banks and insurers could be exposed to the same type of risks that have emerged from the payment protection insurance (PPI) scandal because of the way 'personal contract purchases' (PCPs) are sold to car buyers.

UK regulators are looking closely at the sale and use of PCPs. A report due out before the end of next month from the Financial Conduct Authority (FCA) is likely to offer greater clarity on its views on the fairness of the arrangements to consumers.

While regulatory developments are still in their early stages, there is real potential for PCP contracts to develop into a major regulatory issue affecting the lenders that support the financing arrangements provided for PCPs and the FCA-regulated businesses which do the front line selling.

PCPs and the growth in their popularity

Like traditional car financing, PCP arrangements allow consumers to purchase a car by paying a series of monthly payments.

The central feature of PCPs is that the future value of the car is guaranteed at the start of the contract - this being the guaranteed future value (GFV). PCP deals are therefore based on the dealer's estimation of the depreciation of the vehicle.

At the end of a PCP, the customer generally has three options. They can:

give back the car to the car finance business; enter into a new agreement based on any equity built up over the course of their existing agreement, or by using the value of the car under the existing agreement to start again with a new finance deal on a different car; pay a lump sum to keep the car. Under the arrangements, therefore, the customer does not pay off the full value of the car and they will not own the vehicle at the end of the agreement, unless they choose to pay the lump sum. As such, the initial deposit and monthly deposit are often lower than alternative finance options.

Much like hire purchase agreements, consumers are usually required to keep their car in good condition and within an agreed mileage limit. Any damage or excess mileage over the course of the PCP must be paid for by the consumer. Finance is generally provided by either the dealer's proprietary car finance business or third party lenders.

According to the National Association of Commercial Finance Brokers (NACFB), approximately one million cars were sold via PCPs last year, making PCPs the predominant type of car financing model in the market.

Risks facing consumers who enter into PCPs

There are...