It was announced this week that the Financial Conduct Authority (FCA) is reviewing if people have been overpaying for car finance loans, after a surge of more than 10,000 complains was made to the Financial Ombudsman Service (FOS) pertaining to excessive commission applied to policies.
The Ombudsman has upheld some of these cases, potentially opening the flood gates for a barrage of cases. The ins and outs are a little complex, but if you were sold a car finance deal in the run up to the FCA banning this type of commission in 2021 – you could possibly have grounds for a complaint and compensation.
One reason that the FCA has made this announcement is to stop a rush of complaints from claim management companies – the very same companies who cashed in with PPI mis-selling. The Ombudsman has announced that it is considering charging claim managers for bringing complaints – but you don’t have to use them to raise one yourself.
The Mirror’s Martyn James spoke to consumer rights expert Alex Neill about the announcement and what it means. Alex, said: “This intervention by the regulator is urgent and necessary. Millions of consumers have lost billions because they were charged inflated prices as a result of secret commission deals.
“Complaints have been queuing up at the Ombudsman and consumers need clarity to get back what they’re owed.”
Here’s everything you need to know.
What is a PCP loan?
If you’ve purchased a new car in the last decade from a dealer, you may have taken out a Personal Contract Plan (PCP) in order to pay for it. While the scheme only arrived on the scene a little over a decade ago, it currently dominates the credit industry. More than nine in every ten car finance deals involves PCP credit – and last year, £51billion in new car finance lending was agreed.
There are 6.2million car finance contracts in circulation at the time of writing, with many more expiring. Car finance is the second most complained-about financial product according to Ombudsman data, with most claims brought about by management companies who charge a large sum to make a successful claim.
However, it’s not just commission complaints, and problems pertaining to car finance mis-selling cover a number of types of complaint. It is estimated that hundreds of thousands of PCP deals were mis-sold, and were unsuitable to the person who purchased agreements and additionals, such as insurance.
PCP car finance and commission –
Commission is paid when a business sells a product or service on behalf of another company. This is either charged to you as part of the sales price, or by higher prices for the product. As a result, it can be complicated to understand if you’ve been overcharged.
There is currently a major ‘class action’ suit against three financial giants in Lloyds, MotoNovo and Santander which you’ll be automatically opted into if you’re affected. These cases alone are estimated to have cost customers in the region of £1billion collectively.
If the credit provider isn’t one of these firms, the FCA said that you’ll need to hold fire for a while as the situation is assessed and whether a compensation scheme is necessary.
How PCP loans work –
PCP loans and agreements can be incredibly complex, and this means that a lot can go wrong. In addition, agreements are sometimes sold by people who may not fully understand how PCP lending works, and thus, corners are cut.
- You pay a deposit that covers some of the value of the car (not the full amount).
- You agree to take out a credit deal for a large amount of the cost of the vehicle – but not the whole amount. You pay interest on the amount you’ve borrowed for the duration of the credit agreement. This is usually three to five years.
- This leaves another big percentage of the overall cost of the car that hasn’t been paid off. At the end of the term, you have the option to buy the car outright by making a ‘balloon’ payment This is the amount outstanding needed to buy the car outright. To complicate things, the value of your car will have decreased over time so the business estimates what that final value will be when you take out the agreement.
- In theory you could be left with a smaller balloon payment than the business anticipated at the end of the deal. This would mean it would cost less to purchase. In practice, this is rare.
- Some agreements are sold with a ‘promise’ that you could have credit towards a new card at the end of the deal. This is ludicrously complicated, but works on the basis that if you were to sell the car for a higher sum than the final value, you’d get some credit. This is not common and ‘guarantees of credit indicate mis-sold loans.
- In addition, there will also be other charges that come in to play at the end of the deal. These include a mileage limit – with charges by the mile for every mile you are over the agreed limit in your contract.
- You’ll also have to pay for damage, even minor damage, to the vehicle. This used to be covered by the business under old hire purchase agreements.
- Because of this you’ll be sold insurance policies or service contracts to cover you for various things that could cause damage. These policies can be very expensive and can add over £1,200 to your bill. That’s on top of the standard car insurance you are required to take out by law.
How to complaint about a mis-sold PCP deal –
Here are some of the things that can go wrong with PCP credit and sales, to help you work out if you’re affected.
- Mis-selling: This can include things like the affordability of the finance and agreement, if you were misled in to taking out the contract or if you were pushed in to taking out a more expensive deal than you wanted.
- Financial difficulties: This can include; repossessing the car, hitting you with charges and debt collection. In simple terms, if you’re unable to afford the credit agreement and the firm doesn’t help, if the debt is passed to a private debt collector and other problems arising from the firm making things worse if you are in financial difficulties.
- Excessive charges: Lots of other problems arise at the end of the deal, including; unexpected or unexplained charges and costs, excessive charges for damage and/or mileage, not getting the promised credit refund, problems over the size of the balloon payment, problems cancelling mid-term, refunds and more.
- Add-on insurance products: You can also complain about any additional insurance products you were sold, including cover for hubcaps, alloys, bumpers, windscreen and more. You can also complain to the insurer about claims problems.
Taking things further –
Car finance is regulated by the FCA, so car dealerships must follow strict rules about motor sales. The dealer must be clear about how the deal works and the charges you may face, and they should not over promise and explain how they worked out the balloon payment.
Always keep your documents, and if the retailer doesn’t sort it then you can take the case to the Financial Ombudsman. It’s free and straightforward to make a complaint, so be sure to take it up should you feel misled.