13 January 2024 , 07:00
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We like to be ahead of the curve here at Mirror Money. For getting on for a decade now, we’ve been warning about car finance deals and mis-selling.
As recently as July of last year, I wrote about the problems waiting in the wings with these policies – and your rights. It’s been announced this week by regulator the Financial Conduct Authority (FCA) that it is reviewing if people have been charged too much for these car loans.
This is because there’s been a rush of over 10,000 complaints to the Financial Ombudsman Service (FOS) about excessive commission applied on these policies. The Ombudsman has upheld a few of these cases, potentially opening the door for a flood of cases.
This is all ludicrously complicated, so to summarise, if you were sold a car finance deal in the run up the FCA banning this type of commission in 2021, you could potentially make a complaint and be compensated.
One of the reasons why the FCA has made this announcement is to stop a rush of these complaints brought by claims management companies. Remember them? They’re the businesses that cashed in big time with PPI mis-selling, making a fortune for doing… very little work by making complaints to businesses and the ombudsman on people’s behalf. The Ombudsman has announced that it’s considering charging these claims mangers for bringing complaints – which is good news, because you don’t need to use them to make a complaint.
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I spoke to my old mate and fellow broadcast consumer rights expert Alex Neill about this announcement. Alex told me: ”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.”
If you’re reading this and thinking you might be affected, here’s my guide to what’s been happening, car finance deals and complaints.
What is a PCP loan?
If you’ve bought a car in the last decade, I’d be willing to bet you’ve taken out a Personal Contract Plan (PCP) to pay for it. PCP finance only arrived on the scene less than 15 years ago but has come to dominate the credit industry. Over 9 in 10 car finance deals involved PCP credit... Last year £51 billion in new car finance lending was agreed. In total, there are 6.2 million car finance contracts currently in operation – and many more that have ended. So the update from the FCA is a big deal.
This has been worrying the Ombudsman and the regulator for a while now. Car finance is the second most complained-about financial product according to the Financial Ombudsman data. As I mentioned, these complaints are mostly being brought by claims management companies (CMCs) who charge you a big chunk of your winnings to make a claim. You can find out more about the current situation here.
But it’s not just commission complaints - problems with car finance mis-selling cover loads of different types of complaint. It’s estimated that hundreds of thousands of PCP deals were mis-sold and were unsuitable for the people who purchased these finance agreements and additional extra policies, like insurance.
PCP car finance and commission
One of the dark secrets of financial services is how businesses pay commission to boost sales. Commission is paid when one business sells a product or service on behalf of another company. The commission is either charged to you as part of the sales price (though it’s not often disclosed) or by higher prices for the product sold. As a result, it’s very hard to know if you’ve been overcharged.
It can be hard to know if you’ve been charged commission on a financial product – and commission paid on PCP loans is no exception. There’s currently a major ‘class action’ suit against three financial giants - Lloyds Banking Group, MotoNovo and Santander – that you’ll automatically be opted in to if you’re affected, so you don’t have to do anything (or pay any fees). These cases alone are estimated to have cost one million consumers somewhere in the region of £1bn.
If the credit provider isn’t one of these firms, don’t worry, you don’t have to do anything for now as the FCA has said affected businesses need to hold fire for now while it reviews the situation and considers whether a compensation scheme is necessary. I’d say a redress scheme seems likely.
How PCP loans work
PCP agreements are by far the most complicated of all the financial deals around. In my opinion they are even more complicated than pensions! That means lots of things can go wrong. In addition, the agreements are usually sold by people who may not fully understand the complexities of how PCP lending works – or are so focused on the sale they cut corners.
- 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
First things first, let’s have a look at things that could go wrong with PCP credit and sales, to help you work out if you’re affected.
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- 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 Financial Conduct Authority so even the car dealership that sold you the deal has to follow strict rules about the sale. The dealer needs to make it clear how the deal works and the charges you might face. They should not over promise and should explain how they have worked out the balloon payment.
Keep your documents and what you understood about the deal from the person who sold it to you. And if the retailer doesn’t sort it out, you can take the case to the Financial Ombudsman. All of this is free – and straightforward. So if you feel you’ve been misled, don’t give up – take it further.
- Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist