The FCA, in its recently published consultation: CP19/28 – ‘Motor finance discretionary commission models and consumer credit commission disclosure’, is consulting on proposals to:
- Ban commission models that can give brokers and motor dealers an incentive to increase a customer’s interest rate, and
- Amend parts of its rules and guidance relating to the disclosure of commission arrangements with lenders.
Personal Contract Plans (PCPs) on which these commission models are based have, over the past decade, become an increasingly attractive means to finance car purchase.
In large part, motor dealers/manufacturers have used these products to plug the funding gap for car purchase as the UK Government has significantly reduced the tax incentive for fleet car sales.
These products are essentially a form of ‘Hire Purchase’ (bailment of goods with option to purchase) in which ownership passes on payment of the final instalment and, for these products, it is a balloon payment based upon the predicted value of the vehicle at the end of the contract made at the time the contract. The real attraction of these products i.e. their USP, for all parties concerned, is they are geared to ensure, subject to vehicle condition and mileage, equity will be available at the end of the contract term to be used as a deposit for the customer’s next vehicle. Given these products are based upon a vehicle’s expected depreciation they work best for premium vehicles on which depreciation rates are lowest and, hence, retained value is highest.
Consequently, these schemes have become particularly attractive in the UK as individuals have been able to buy new vehicles and upgrade these on manageable financial terms, which would otherwise not be possible on other forms of credit.
However, with the motor industry in something of an upheaval due to falling diesel (and petrol) engine car sales as a result of the emissions scandal and tax hikes and moves towards electric and hybrid engine car production, there is trepidation among analysts about whether PCP contracts will continue to be viable or whether the cost/price model simply will no longer work for the majority of prospective purchasers.
As it stands, the biggest losers here are those manufactures who have their own financial arms e.g. VFS UK who will have to pick up the ‘tab’ as most of these contracts provide for a guaranteed residual value.
While it cannot be right buyers are forced to pay higher interest rates through the manipulation of higher commissions, the FCAs assertion that banning these commission models will lead to lower pricing is less clear, given the wider stresses at play in the industry.
We continue to monitor for any impact on ‘vulnerable customers’ but the FCA specifically state that it did not find evidence that harm primarily affects vulnerable consumers and that in fact, the majority of affected consumers were in the near-prime category of credit scores. This link may have been conflated as there was a news report of a buyer, who had diligently researched the cash price of (her) chosen vehicle, only to be encouraged onto a PCP contract by the dealer.
Otherwise, it is well known Claims Management Companies are on the lookout for their next big thing as their income derived from PPI miss-selling draws to a close, although whether or not this turns out to be the next big scandal, only time will tell.