PCP is coming under scrutiny from the NACFB, which believes it may be being mis-sold by dealers. Interest and use of the term ‘profit’ are critical considerations. Jonathan Minter finds out more
Last month the National Association of Commercial Finance Brokers (NACFB) warned of a risk that the claims management industry, which has expanded enormously thanks to the scandal surrounding payment protection insurance mis-selling, may soon to start to cast its beady eye on the sale of certain motor finance products.
Specifically, the NACFB highlighted aspects of the sale of personal contract purchase, which it said could potentially be being mis-sold by dealers.
Considering nearly 85% of all new cars sold in the country over the past 12 months were on finance, and the majority of these were PCP, it was unsurprising when this provoked a reaction.
The story made national headlines and, based on the feedback Motor Finance since received from readers, stirred real debate in the industry.
According to the NACFB’s head of motor finance, Graham Hill, the warning came about as a result of a conversation he had with a claims lawyer. During their chat, the lawyer noted that although there is still money for them to make with PPI claims, they are slowing down.
Hill paraphrases the lawyer as saying: “We’re looking very carefully at the FCA rules and regulations, and we’re certainly having a look at PCP and the way it’s sold. We’ve carried out quite a lot of investigation into this area and some people seem to have been misled.”
Another member of the NACFB has also said something similar to this, except about potential actions against mortgage advisors since the original release.
“These are all consequences of what’s been happening with the FCA,” adds Hill. “The FCA has come in with a mass of new rules and regulations, and consequently, when these things happen, it potentially leaves the door open for legal challenge when brokers, lenders or, in this case, car dealers don’t stick to the newly created rules,” adds Hill.
The problem, Hill continues, centres around mis-selling at the dealership, specifically with the varying interest repayment amounts, and the use of the word ‘profit’.
For the former, he notes that the same interest rate for a PCP deal and an HP deal will see a customer pay more on the PCP, due to the structure of the balloon payment. This isn’t a problem in and of itself, Hill notes, calling PCP “one of the best products out there”.
The problem occurs in the potential scenario where a customer is not informed that a comparable PCP deal could end up costing more than its HP equivalent.
On this topic, Hill says: “When a customer visits a dealer and he’s talking to a sales person, and the salesperson says you can take HP or PCP, that the PCP will be on the same APR, and you’ll be paying a lot less per month, the customer may ask if they’ll be paying less in interest?
“At best, the salesperson will say: ‘No, you’re paying the same, because the APR is the same.’
“In fact, this isn’t true; for years I’ve said that APR is toxic. It gives no guidance whatsoever to what the genuine cost of finance will be. You cannot use it to compare products. And in this situation, even with exactly the same APRs quoted, you will pay much more.”
What is profit?
The second area on which Hill focuses is the use of the term ‘profit’, where he claims there is a disparity between what the public assumes is profit, and what is actually profit.
In one example, he says: “Take a £10,000 car with a £4,000 balloon; if the car is worth £5,000 at the end of the agreement, and you receive £1,000 back; that’s not profit.
“People perceive it to be profit, and the way it’s been sold is that if this is the case and there is equity in the car, you have made a profit.
“It’s not actually profit, its £1,000 you’ve already paid to the finance company being paid back to you by the dealership.”
The profit, he notes, comes when the car is worth less than the guaranteed future values, as this means the consumer has not paid the full depreciation.
A second opinion
Chris Cooper, MD of Challenge Consulting, says the view coming from the NACFB should certainly ring alarm bells for those selling motor finance, and get them to double-check their finance sales proposition.
In addition, he questions whether some customers who have taken out a PCP deal, who will clearly not be in a position to make the final balloon payment, might in some circumstances be better served with a traditional personal contract hire product instead.
“It would be interesting to find out what proportion of PCP cars have been handed back at the end of their term over the past few years,” he notes.
Despite this, he suspects PCP will not become this industry’s PPI.
One reason, for this, he says, is because: “PPI was clearly mis-sold in some cases because customers were essentially led to believe or understood that it was a mandatory or built-in part of the loan, mortgage or credit card application they made. They didn’t realise it was optional.”
It doesn’t feel like an exact equivalent is happening here.
On top of this, he notes that there were some different public reactions to the diesel scandal in 2015, and the banking crisis in the recession.
He notes: “We’ve seen no real stories castigating senior executives of car businesses and OEMs for the rewards they had, and the recognition they had while they served society through the activity of their business.
“That’s not really happened in the main. A reason for that is people value their cars and mobility far higher than they value financial services. They’ve had a longer period trusting and valuing the proposition that they get from a car maker than they have a bank.
“That’s why cars have not replaced banks on the naughty step in the eyes of society.”