FCA Could Accidentally Be On-Course To Destroy An Industry
Thursday, 17. October 2019
On the 15th October the FCA published its report into the way that PCP has been sold by dealers and brokers. Unfortunately, it focused on the way that they uplift interest charges to pay themselves commissions instead of the more important areas of blatant mis-selling.
Here is what I said about the report.
I was disappointed to read the update from the FCA and see that they have made such a major issue over the commission paid for organising finance rather than the plethora of other areas that could result in mis-selling and consumers losing out.
We must first stop treating PCP and Personal Contract Hire as finance agreements. Even HMRC has partially recognised this by introducing two ways of recording PCP agreements. If the agreement is set up with a final payment that is below anticipated value of the car, leaving equity in the car for the customer, it is treated as a finance agreement.
If there is no equity planned the agreement is regarded as a ‘Service Agreement’ and attracts VAT on the monthly payments (as well as VAT adjustments on the purchase of the car and the sale of the used car).
Once it has been agreed that the products are not simple finance agreements we need new laws to cover them as current laws are totally inadequate.
Given the nature of PCP’s you cannot simply extract one part of the equation and target that one item as a way of penalising the providers, i.e. car dealers and independent brokers. The actions proposed will not benefit consumers as dealers will simply move the lost income out of the commissions paid on finance to decreased discounts or reduced manufacturer subsidies.
With dealer groups reporting poor performance and issuing profit warnings they have to get their income from somewhere. APR is simply part of the marketing equation. When a dealer advertises 0% APR or low rate (subsidised) APR it doesn’t mean that he receives nothing in commissions.
The manufacturer will simply pay the dealer out of the discounts or subsidies that the customer no longer receives due to his attraction to either low rate or zero rate APR.
The APR could also reflect the amount of time that the dealer spends explaining and putting the finance in place. This is certainly the case with independent finance brokers. They earn their commission out of the interest charged thereby spreading the cost for the customer rather than charge a fee.
The broker needs to know how and where to place the business using a panel of funders. As we know the higher the risk the higher the interest charged and often increasing the time the broker spends on the case which has to be paid for.
Let’s face it customers are really only interested in what they have to pay upfront and what they pay monthly. The slicing of the cake is of little interest. The downside is that if dealers and brokers lose the ability to set rates and commissions to suit the circumstances we will see wholesale shut downs of dealers and brokers – is that really good for competition?
It will also mean that dealers and in particular brokers will concentrate on the easy cases leaving those with tarnished credit unable to get to work or take their kids to school because they can’t get finance for a car.
Finally, I would say that we need new laws to cover PCP and PCH agreements. APR and monthly payments are both negotiable and walkaways. Tell a dealer or broker that you won’t pay the APR on the quotation it’s up to him if he wants to see you walk out of the door or negotiate a better deal.
It is possible that the dealer is using his finance commission to increase the part exchange allowance. It is a complicated calculation. What we need are laws that cover the selling of ‘add-ons’, excess mileage charges, end of contract condition when the car is handed back, what happens to your agreement if you die or are unable to drive, etc. etc.
We also need clarity over the anti-competition activities of dealers such as Pendragon Group and other dealers when they refuse to invoice finance companies selected by consumers to provide their finance as they are not their own finance providers or on their panel of providers. Some will invoice a 3rd party funder but charge the customer between £250 and £500 for the privilege. Now that needs attention! By Graham Hill
