A customer going through a contract with a car salesman in a car showroom.

The PCP finance “ticking time bomb” is set to explode

The Financial Conduct Authority (FCA) has been making noises around car finance mis-selling for several years. Now, what was once described as a “ticking time bomb” of potentially mis-sold personal contract purchase (PCP) agreements is set to explode. Or has it already done so?

What is PCP finance?

PCP is effectively a form of car leasing, with estimates that up to 90% of all new – and a substantial number of used – car purchases happen via this method. In contrast to hire purchase (HP), where you pay a deposit, make regular payments, and own the car after your final payment, PCP finance sees you:

  • Pay your deposit, sometimes up to 30% of the car’s value, depending on the car dealer and PCP lender.
  • Make your regular repayments.
  • Have an “option to purchase” by paying the remainder of the value at the end of the agreement, which is often a similar figure to your deposit.

The “option to purchase” also gives you a “Guaranteed Future Value (GFV)” for the car, assuming it is at or below the agreed mileage limit at the end of the deal. If you go over your mileage, you’ll need to pay the agreed amount per mile, usually a few pence + VAT.

In most cases, the car dealer will contact you before the end of your PCP agreement. You usually get the option to transfer the excess value of the car, which is the actual assessed value minus the GFV, as the deposit for a new deal. People love this, as it means getting a new car at worst every few years and lower monthly payments than if you were to go for HP or get a loan to buy a vehicle outright.

However, there are some downsides to PCP:

  • You never actually own the car unless you make the final payment at the end. This might not be an issue, but it would mean, for example, that you couldn’t use the car as security against borrowing if you needed to.
  • While PCP may seem simple, it is a relatively complex financial product.

That complexity has seen PCP get the attention of the FCA. Specifically, the regulator is focusing on undisclosed and hidden commissions, the basis for many car finance mis-selling claims.

What has the FCA said?

Complex financial products always get the FCA’s attention because there’s more scope for non-compliance, mis-selling, and profiteering at consumers’ expense. And because you, the consumer, often don’t really know what’s going on or want to know about the complexities of a product, you ask no questions, and the people and businesses undertaking the non-compliance, mis-selling, and profiteering can continue doing it as they please.

In a 2019 report, the FCA estimated that car finance mis-selling victims had overpaid, on average, £1,000 during their agreement. At the start of a further regulatory investigation in January 2024, this had risen to £1,100.

At LawPlus, we’re seeing an average overpayment of £1,500 per agreement, which we’re working to reclaim for our clients. Start your claim now.

When the FCA published its report, many industry analysts likened the regulator’s analysis and the language used to that involved in the payday loan mis-selling scandal. Since then, car finance mis-selling has come to be known in some circles as “the new PPI.”

In recent years, some car dealers have begun making provisions in their accounts in anticipation of having to pay redress to mis-sold consumers. At the same time, many lenders have also exited the market and no longer offer PCP finance.

As of April 2024, the FCA’s investigation into car finance mis-selling is on pause to allow car dealers and finance brokers to “self-investigate.” In practice, this means that many people like you who may have been mis-sold have had their claims paused until at least September.

How does PCP mis-selling arise?

There are several ways a PCP agreement may have been mis-sold. The basis for most claims at present is that a broker or intermediary earned hidden commissions by artificially inflating your interest rate. So you paid more money than you should have done during your agreement – the overpayment being the amount you would be looking to claim – while the person who sold or recommended your finance deal earned more money.

Want to know what this looks like in practice?

One of the most significant issues with PCP is that, in many cases, the car dealer or salesperson often acts as the finance broker, creating a clear conflict of interest.

Until the FCA banned Discretionary Commission Arrangements (DCAs) in January 2021, car dealers could artificially increase your interest rate to ensure they earned more money. In most cases, you wouldn’t get a choice of interest rate; you’d just be told what interest rate they “can offer you.”

The FCA takes the understandable view that if consumers knew about the commission element of the deal or believed they had a choice of different rates, they would have attempted to negotiate or considered alternative options.

Non-disclosure of commissions is already accepted as a valid basis for claims thanks to the 2014 Plevin ruling, which has since been used as a precedent for other claim types, such as business energy mis-selling.

As such, if your car finance agreement was mis-sold and there were hidden commissions, your lender will likely have little in the way of a defence.

Can I claim?

As with other types of financial mis-selling, you likely won’t know that you were mis-sold car finance until someone investigates it or the lender admits to adding hidden commissions into your interest rate and agreement.

At LawPlus Solicitors, we can help you discover if your car finance agreement was mis-sold if:

  • You had car finance in the past six years, then we can identify these agreements via a soft credit search and investigate them on your behalf, or;
  • You have had car finance at any time since 2007 up to six years ago, and still have your paperwork, our team can investigate.

Once we’ve identified whether you may be entitled to compensation, you are under no obligation to instruct us and can pursue your claim yourself if you wish. Our initial check is free, so you have nothing to lose by getting us to look into your car finance deals.

Given the potential scale of mis-selling and the fact we can investigate both existing and prior car finance agreements, you could stand to collect a significant sum.

Start your PCP claim with LawPlus.

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