FCA Motor Finance Report Published
We have recently seen that the long-anticipated Financial Conduct Authority Motor Finance Review has been published, gathering huge attention from the motoring industry.
As many predicted, a spotlight was shone on PCP (Personal Contract Purchase).
The review highlighting that in 60% of the market, as much as £300m is being overcharged to customers by dealerships every year. This is done by inflating interest payments to obtain higher commissions for the business.
The FCA, or Financial Conduct Authority, is the independent regulatory body for the UK Financial Sector. Formerly known as the Financial Services Authority (FSA), the FCA led review reveals that the PCP format is too complex and lacks transparency for customers; something the FCA has been combatting since it’s inception 6 years ago, following the PPI scandal.
An estimated 90% of all new cars sold through dealerships are on a PCP contract - this allows the customer to rent the vehicle for an allotted amount of time, with a final “balloon payment” to be made to secure ownership of the vehicle.
Due to this huge swing in favour of PCP contracts, claims firms that are coming down from their wave of PPI business, will surely be looking to grab onto this scandal in order to keep momentum.
The FCA investigation has found that across a 4-year term, the average customer was overpaying by around £1,100 in interest.
Then at the end of the agreement, the customer would find themselves in negative equity with an inflated balloon payment still to be paid.
Alternative research has also shown that customers can save an average of over £4,000 with leasing, compared to a PCP agreement.
What Does This Mean?
This all means that in the upcoming wake of the likely bad press around PCP agreements, we can expect to see many more customers looking at PCH (or Personal Contract Hire) as a viable financing option for their new cars.
It would also mean that the FCA and the BVRLA (British Vehicle Rental and Leasing Association - the governing body for leasing and rental companies) will have to further scrutinise current practices, no doubt resulting in much more transparent services for the consumer.
Whilst it is commonly accepted practice for companies to earn commission on contract agreements, the complexities of these agreements - between lenders and suppliers - are likely to become the target for the aforementioned scrutiny and impending clarification measures.
Much like the banks and insurance companies have strived to do in the wake of the PPI scandal, the motoring industry will be forced to take huge steps in obtaining the public’s trust - amidst a wave of PPI-style claims and uncertainties associated with Brexit.
We have always believed that the PCH model to be the clearest and simplest form of vehicle acquisition and it is likely that more companies will follow suit - or be left amongst the rubble.
Regardless of the magnitude of this in the national news, our sector will - and must - change.