For several years, claims lawyers have been making great business out of PPI claims. Banks and insurance providers were found guilty of mis-selling personal protection insurance to millions of borrowers. But now that gravy train is nearing the end of the line, lawyers are turning their attention to other areas of the consumer finance sector. And one of their targets appears to be the potential mis-selling of PCP car finance.
The National Association of Commercial Finance Brokers (NACFB) has made this very claim last week, with board member and car finance specialist Graham Hill warning that “the car finance industry could be shaken to its roots.”
Finance companies have been generally aware that the Financial Conduct Authority (FCA) has been keeping an eye on the car finance sector for a while now, with the intention of looking more closely once the PPI scandal had been dealt with. Now it appears that the claims lawyers may also be ready to move in. So what does this mean for consumers, apart from getting thousands of annoying texts and phone calls asking if you have ever had a PCP?
The NACFB claims that one million cars were sold in the UK on a PCP car finance agreement last year alone, and that there is evidence of “insufficient, poor or, in some cases, deliberately misleading advice given by car dealers and finance firms” to customers.
Car dealers are not allowed to make recommendations
Under FCA accreditation for the selling of finance products, car sales staff (including business managers) are only allowed to operate on a ‘non-advisory’ basis. This means that they cannot recommend a particular finance product, and can only present you with the options for you to make your own decision. However, in the real world, most dealers will push their customers towards the finance product which is best for the dealer – and that is usually a PCP.
I would be surprised if many car buyers feel that their dealer gave them a comprehensive explanation of all the finance options available when buying their last car.
As we have discussed previously here at The Car Expert, the PCP is the preferred finance option for most car manufacturers and dealerships, so they will use any number of means to entice customers into taking a PCP. There are legal means of doing so, such as providing deposit contributions or lower interest rates for PCP deals, but any potential legal scandal is going to revolve around the mis-selling of PCPs by dealers.
How are dealers potentially mis-selling finance?
The mis-selling potential currently being investigated by PPI claims lawyers concerns two key areas of how PCPs are presented to customers:
- Buyers are not being informed that they may be paying more in interest on a PCP than on a hire purchase (HP) finance agreement, even if the advertised APR is exactly the same.
- Buyers are also often told that they will make a ‘profit’ on their car with PCP finance, if the car is worth more than the GMFV at the end of the contract. In reality, this is not true and is misleading.
The way that the interest is calculated on a PCP is different from an HP because of the guaranteed minimum future value (GMFV) component of a PCP. This is basically an interest-only loan that is not repaid until the end of the term, either by giving the car back or paying off the outstanding balance. Although the total amount of interest payable must be clearly indicated on finance quotes and contracts, car dealers are not always scrupulous in explaining how it works or presenting the HP alternative – even in response to customer questions.
Of course, there are many dealers and individual sales people who are entirely fair and correct when selling car finance. However, there is certainly still a significant amount of mis-selling (whether deliberately or not) that goes on. From my own time in car sales, I remember being told off by a finance manager for providing explanations and information to customers about different types of finance, rather than only providing information about the PCP offer and trying to dissuade customers from asking about other types of finance.
Are we really headed for a PCP mis-selling scandal?
So is there real merit in claims cases against dealers and finance companies for mis-selling of PCP finance? Quite likely.
Just like the PPI scandal, a small number of bad apples can spoil the whole bunch. Big banks were hit for billions of pounds in PPI mis-selling compensation due to the actions of a relatively small number of employees. The lawyers will be out in force again if they sniff an opportunity to go after another group of wealthy finance companies and banks for mis-selling PCPs or other car finance products.
If the FCA or claims lawyers start looking at the way car finance is handled by dealers, they are are likely to come across numerous examples of mis-selling. How much impact it would be likely to have on the industry is likely to depend on how much control the finance companies who lend the money have exerted over the dealers who sold the finance on their behalf.
The lawyers will be trying to establish that a finance company is responsible for how its dealers sell its finance products, and will be looking for any directives given to dealers to prioritise PCP finance offers over other options without taking the customer’s individual requirements into account.