FCA will review the suitability of Personal Contract Purchase (PCP), with a focus on 4 key elements. Mark Davies explores this topic in his latest blog.
There has been a steady rise in new car purchases in the last five years. Inflation is low, interest rates are low, consumer finance is readily available and unemployment is low. All these factors have led to a substantial rise in new registrations. 2015’s was a record year for car sales of 2.63 million across the United Kingdom and 2016 was even higher with new car registrations up to almost 2.7 million. And 2017 looks like being another very strong year with 1.40 million new car sales to the end of June compared with 1.43 million in 2016.
The last decade has since seen growth in the use of Personal Contract Purchase (PCPs), a form of Hire Purchase and now the majority of new car finance is via PCP. Some articles state that PCP agreements account for as much as 87% of new car purchases. The key feature of a PCP is that the value of the car at the end of the contract is assessed at the start of the agreement and deferred, resulting in substantially lower monthly repayments.
FCA stated in the Business Plan 2017–18 that they were “concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry.” And they announced a review to “identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance.” FCA said they would decide whether and how to intervene in the market after the review.
There has been a lot of press about PCP, mainly focused on the risks to consumers. One of the draws of PCP is that consumers can afford a more expensive car with lower monthly payments than using traditional forms of car finance to buy a car outright. This means that people buy a new Mercedes rather than a second had golf. This also means that they have the risks of a large bubble payment at the end of the contract, a large exposure if they have an accident or if the car depreciates more than expected.
On 31 July FCA gave a very short update of their work to date with the intention of publishing a more substantive update in Q1 2018.
FCA summarised the attractions of PCP as follows “PCP provide the flexibility to own the car at the end of the agreement by paying the deferred value (‘Guaranteed Future Value’, GFV), or to enter into a new agreement (using any equity built up over the course of the existing agreement). The consumer also has the option to simply give the car back, but they will often incur any excess mileage and/or damage costs.
Consumers may also be approached prior to the conclusion of their PCP agreement with the offer of entering into a new agreement, if equity has been built up. We have found that this is a key driver for brand loyalty that many customers find attractive.”
FCA is now going to focus on four key questions:
- Are firms taking the right steps to ensure that they lend responsibly, in particular by appropriately assessing whether potential customers can afford the product in question?
- Are there conflicts of interest arising from commission arrangements between lenders and dealers, and if so are these appropriately managed to avoid harm to consumers?
- Is the information provided to potential customers by firms sufficiently clear and transparent, so that they can understand the risks involved and make informed decisions?
- Are firms managing the risk that asset valuations could fall and ensuring that they are adequately pricing risk?
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