PCP Claims – Is Car Finance Unfair?
What is PCP?
PCP, or Personal Contract Purchase, is a particular type of car finance. It has been developed to facilitate the purchase of ever increasingly expensive vehicles by way of finance, because the payments are not based on the full vehicle price. Instead, a balloon figure is set into the agreement and monthly payments are then made towards the remainder over the term of the finance agreement. This means that at the end of term, the vehicle is not owned automatically outright, and the customer must at that point decide which of a number of options to take (such as paying off the balloon figure and taking ownership of the vehicle).
In 2018, research by Auto Trader indicated that by 2028, all new cars would be purchased by some form of finance. Currently, over 90% of car purchases are made on finance, according to a 2020 report, and many brands now say that three in four new cars are already purchased by PCP.
The UK car loan market is worth £75m, and 2.3 million cars each year are sold subject to finance.
Is car finance unfair?
Unfairness to consumers in terms of financial transactions gained prominence as a result of the eponymous “PPI Mis-Selling Scandal”. Since around 2008, brokers and lenders have been forced to deal with complaints and court claims from millions of consumers who were mis-sold PPI (payment protection insurance) and were not told about substantial undisclosed commission and profit share. Since 2011, the Financial Conduct Authority (FCA) estimates that £38.3bn of redress has been paid out and the likelihood is that this figure will reach £50bn by the time all claims have been settled. It has been badged as the biggest mis-selling scandal in history.
In 2020, the FCA published its policy statement, PS20/8; Motor Finance Discretionary Commission Models and Consumer Credit Commission Disclosure. This followed research into the motor finance market and the way in which lenders were paying commission to dealers. The FCA banned a particular form of commission model with effect from January 2021. Lenders had allowed dealers discretion over the rates of interest being paid by consumers under their car finance agreements, with the extra interest generated being used to pay for dealer commissions. This had the two-fold effect of both removing the link between credit risk and interest rates; and unnecessarily increasing the cost of car finance. As the FCA noted, the risk was of ‘consumer harm on a potentially significant scale’, and that it created a conflict of interest alongside an incentive for dealers to set higher interest rates in their own interest. The FCA calculated that the cost to consumers could be an extra £300m annually.
What does this mean in terms of a claim?
Under s.140 of the Consumer Credit Act 1974 (the CCA) consumers can bring claims which relate to an ‘unfair relationship’ – that is, alleging that the lending relationship between the lender and them is unfair. Many PPI claims have already been brought relying on this basis, with allegations that the undisclosed commissions paid with regard to PPI policies rendered the relationship between the lender and consumer unfair.
So, what does this look like in practice? Whilst such claims are still fairly new, there have been some interesting court decisions already:
Example Cases:
In Beckett v BMW Financial Services (GB) Limited, BMW had allowed the car dealer discretion in setting the rate of interest paid by the customer under the agreement, with the dealer pocketing the difference in interest as commission (this is known as the ‘difference in charges’ model). The customer would end up paying a higher interest rate under the car finance agreement as a result of the way that BMW had decided to remunerate the dealer. The Court found that this practice amounted to an unfair relationship; the linking of interest to commission meant that the dealer was incentivised to get the customer to pay more in interest (and therefore a higher amount under the credit agreement) so that the dealer could earn more itself. The failure to disclose this meant that the customer was not able to make a properly informed decision about the credit agreement and made the relationship unfair. Using the wide discretion under the unfair relationship provisions, the Court also ordered that the customer should receive payment of the commissions along with the recalculation of the credit agreement, so that she also received an amount equivalent to the overpaid monthly instalments, which had been inflated because of the commission structure.
In Prendergast v BMW Financial Services (GB) Limited, a similar situation existed. The dealer also had discretion to vary the rate of interest payable by the consumer upwards, and this had resulted in commission being paid that had not been disclosed to the customer. The Court again found that this created an unfair relationship. The inequality of knowledge between the ‘sophisticated’ lender and ‘naïve’ customer regarding the commissions was found to be a classic source of unfairness and sufficient to render the relationship unfair. Furthermore, the Court went on to state that the purpose of the CCA was to provide consumer protection, and in this instance there was ‘manifest unfairness’. As a result, the court ordered that the undisclosed commissions should be paid to the customer, along with interest at 8%.
In Fudge-Adams v Black Horse Limited, the dealer again had discretion to set the rate of interest being paid by the customer. It was accepted that the dealer had discretion to charge between 6.35% and 12% interest; it had charged 12% interest which made the rate of APR 25.5%. As a result, commission of £881.60 was paid by the lender to the dealer, along with a further commission of £637.25 which was based on the volume of sales made by the dealer. The Court found that the dealer was under a duty to provide information, advice or recommendations on an impartial or disinterested basis. Whilst it had been mentioned in the documents provided to the customer that a commission may be payable, the Court’s view was that no precise details or information were provided. The Court accepted that the customer thought that the dealer would have made money from the car sale alone, and not from the finance. As such, the Court decided that there was a duty on the dealer to explain that commissions were payable, and the impact these charges made to the amount which the customer was paying under the agreement. This was therefore a breach of duty and enough to establish an unfair relationship. The Court therefore awarded the customer the return of the commissions which had been paid along with interest, and also the amount by which the payments had been inflated because of the uplifted rate of APR.
Summary
Whilst it might be early days for PCP claims, it is clear that the Courts are willing to step in to remedy the perceived unfairness caused by what is now a banned business practice. Watch this space to see how the law develops.
