In 2005 the Financial Services Authority (FSA) reported that the PPI mis-selling scandal would cost the banks of over £40 billion. It was the most expensive mis-spelling bill in the whole history of UK financial services. Now in 2018, we are potentially on the brink of another financial services scandal: the ‘PCP Scandal’. Over the past months, it has emerged that the car finance product known as Personal Contract Purchase or PCP might be the next mis-selling headache to hit the sector.
Let’s be clear about what Personal Contract Purchase or PCP is. This is a purchasing contract that provides the customer with the opportunity to drive a high-value car at a significantly lower monthly price – but people that opt for this contract do not own the vehicle and they will only be paying the interest on the car and covering its depreciation during the contract term.
According to Green Flag, the UK’s car finance business is worth a whopping £41 billion. But research shows that about 90% of those who sign up for this contract are on the brink of being a victim of mis-selling. This was discovered last year after the Financial Conduct Authority (FCA) began an investigation into automotive finance in the UK. According to the FCA “The majority of customers have no idea who their financing contract is with, even though the rules state the buyer has to know who they are dealing with; along with everyone else involved in the chain.”
According to the FCA their concern is for customers who are unable to afford the final payment – known as the ‘balloon payment’ – because under a PCP agreement the customer does not own the car unless they pay the balloon payment at the end of the contract. Many people are unable to afford that payment (due to the car not achieving its expected future value) and are effectively in a negative equity situation. In those circumstances people usually opt to sign up for another PCP agreement on a new vehicle, and the cycle continues. According to the National Association of Commercial Finance Brokers (NACFB) “the complex nature of PCP is being exploited by dealers to convince drivers they are getting a better deal, or that PCP is a more economical alternative to traditional hire-purchase (HP) arrangements.”
According to the FCA, their investigation will be based on the end-to-end sales process and identify whether the proper checks and customer safe-guarding procedures are correctly adhered to. Then customers around the UK might deserve compensation if by any chance the investigation concludes that the automotive industry has been mis-selling PCP. The effect on the motor finance industry, especially smaller lenders, could potentially be catastrophic. Given that about £40bn was set aside to resolve the infamous PPI scandal; it may not be overly dramatic to suggest that the automotive finance industry should give their contingency plans for an impending PCP scandal some thought sooner rather than later.