A recent investigation by the Financial Conduct Authority (FCA) has suggested that prospective car buyers may be overcharged by as much as £1000 when taking out loans for a new car. The discovery has been disputed by the Financing and Leasing Association.

Investigation

In recent years, finance from car dealerships caused a rapid increase in consumer credit. This led to the FCA launching an investigation in April 2017. The focus was on identifying potential conflicts of interest and a lack of transparency in the motor finance system. It studied the contracts made between dealers and lenders from 2013 to 2016, as well as data from lenders between January 2017 and July 2018.

Personal contract payments (PCP) account of three-fifths of car finance arrangements. Prospective buyers may rent the car for a period of three or four years. At the end of this time, they have the choice of returning the car, making a residual payment to finalise an outright purchase or using that residual amount to help buy another vehicle. An average motor finance deal is for about £10,000.

Findings

The problem the FCA found was that the setting of interest rates on PCPs is controlled by dealers and brokers. As the broker’s payment is commission-based, it is in their interest to charge higher rates to increase their own profits. On a £10,000 deal, this could lead to the customer paying an extra £1000 across four years. In total, consumers may be losing £3 million a year.

On top of the conflict of interest, the FCA has highlighted concerns over transparency in car financing arrangements. Dealers may not be properly disclosing the nature of their contracts and the costs involved. This means they are not meeting the obligations they currently have under the law. Other legal obligations for those in the motor trade include motor trade insurance. Quote Me Today provide motor trade insurance, as do other companies.

The Financial and Leasing Association claims the findings are the result of out-of-date information.

Future

Having identified these areas of concern, the FCA is assessing potential interventions it could make to improve the situation. These include strengthening current rules or outright banning certain types of commission. Until then, it is working with the individual firms identified in the investigation on reforms and hopes other lenders and brokers will review their practices.