PCP (Phencyclidine) was developed in the late 1950s as an anaesthetic, but become banned from prescription a decade later due to being linked to amnesia, hallucinations, confusion and mood changes amongst patients.
Parodying its namesake is the personal contact plan or PCP. PCP has undoubtedly served its purpose in alleviating five years of pain for the new car industry both in terms of increased sales and VAT efficiency. (Mercedes-Benz Financial Services UK Ltd v Revenue and Customs Commissioners [2014] UKUT 200 (TCC).
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The democratisation of finance, or "financialisation" of the car industry, has seemingly been the consumer tide that lifts all dealers, just as it had been for the banking and mortgage market 20 years previously.
Over the past five years new car sales have risen steadily to near record levels this year, with reportedly an incredible 75% being funded through dealer finance, suggesting that manufacturers are suffering from amnesia.
Banking history from 2008 illustrated the risk of having "all your eggs in one financialised basket", and it’s not by accident that six years later and coinciding with "bad credit markers" being expunged from credit reference agency records, that consumer finance is on the up. A ‘hallucinogenic’ effect occurs where a one-time subprime borrower is now presented as prime, leading to an inaccurate assessment and distribution of risk, albeit hedged by the retention of ownership by the finance company. Nevertheless this is reliant upon the strength of the underlying asset, the car, which is systematically being undermined by the resultant oversupply of end-of-contract returns and part exchanges, leading to the accelerated erosion of residual values.
Manufacturers use "damage clauses" to mitigate the risk of further depreciation based on condition, by making customers liable for the cost of repairing "non-wear and tear deterioration". However, this does presuppose that the government’s consumer protectionist mood change won’t extend to challenging these clauses for fairness and proportionality, given the risk for customer exploitation.
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By GlobalDataDespite the similarity of the side effects, personal contract purchases are unlikely to follow their namesake in being banned. However, they are subject to FCA scrutiny which, coupled with being at dangerous levels of monopolising dealership business models, threatens to undermine the economic recovery.
Philip Harmer is a partner at Stormcatcher Business Services, specialising in motor trade law, employment and commercial law.
