The Financial Conduct Authority (FCA) has been investigating claims that that personal contract purchase plans for new cars could be mis-sold and has warned it will crack down on the firms involved if they don’t clean up their acts.
Concerns were raised last year that the widespread use of commission models, which allow the broker to set the customer’s interest rate on any deal has led to some consumers overpaying by more than £1,000.
The FCA said it had found that some motor dealers have overcharged unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts.
It also has concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments.
The National Association of Commercial Finance Brokers (NACFB) last year said it was concerned that consumers were paying considerably more interest with a PCP than they would if they chose hire purchase.
Mystery shopping by the FCA found that consumers taking out a PCP deal on a £10,000 car over four years could be paying as much as £1,100 over the odds in interest payments.
It found that the practice of allowing the finance broker to set the interest rate for the deal could result in a conflict of interest because of ‘strong incentives’ to raise the interest rate in order to make more commission.
It said: “We are concerned that the way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale.
“Some customers are paying significantly more for their motor finance because of the way lenders choose to remunerate their brokers.”
The FCA added that it will follow up with the individual firms and may consider supervisory or enforcement action.
The Finance and Leasing Association, however, said the FCA report had been based on out of date information. It added: “Therefore it does not reflect the very considerable progress the market has already made in moving away from such structures.”
Director of the National Franchised Dealers Association, Sue Robinson, said: “Franchised retailers take rigorous steps to be compliant with consumer credit rules and can only offer car finance under strict conditions.”
Full disclosure of commission paid on motor finance at the point of sale could be imminent following the FCA review
James Tew, Chief Executive at the online motor finance technology specialist iVendi, said that the results were harder hitting than many in the industry expected and a clear sign that business-as-usual was not an option.
“Our reading of the review is that the FCA has actually developed a much better understanding of the industry than previously and that what it is saying about introducers, whether they be motor dealers or specialist credit brokers is in many respects probably correct.”
Tew said: “This is very much a clear shot across the bows for motor finance companies and their approach to operational oversight of introducers. Better solutions and processes will need to be put in place.
“The ultimate sanction is probably if full disclosure of commission at the point of sale is made mandatory, something that introducers will be very keen to avoid.
“It may already be too late to avoid this but the industry could certainly attempt to pre-empt any FCA action by ending the practice of introducers controlling sell-out rates.”