In its final submission to the DTI consultation on voluntary terminations (VTs), the FLA has urged the Government to axe the outdated 66-year-old law – better known as the half rule – which it says is costing the motor industry £83 million a year. The SMMT, many of whose manufacturer members own car finance subsidiaries, has backed the call.
Under current law, a customer can buy a car on higher purchase and then hand it back without further liability if they have already paid 50% to the finance company.
A 12-week DTI consultation looking into the future of a consumers right to end hire purchase and conditional sale agreements was launched in September.
The aim of the consultation is to help the Government decide whether voluntary termination (VT) legislation is in the right format and relevant in today's modern consumer credit market.
The proposal’s options are:
The FLA says VTs distort the credit market and result in businesses and consumers paying higher rates of interest on credit agreements while people in real need of protection – such as those in financial difficulty – lose out.
Research carried out on behalf of the FLA, by Oxford Economic Research Associates, confirms that current rules lead to 'financial exclusion' for those with poor credit ratings, while customers with good credit standing are also disadvantaged by being offered loan products other than hire purchase (HP) or conditional sale (CS).
Small and medium sized businesses are also losing out on access to finance for capital investment, as leading lenders are restricting HP and CS as finance options on IT and office equipment because of the VT provisions. This, says the FLA, means a company’s choice of finance is more limited than it could be.
In the motor market as a whole, the research confirms that VTs are also having an adverse effect on the residual value of vehicles.
The research concludes that abolition of the VT provisions 'would eliminate the distortion of competition between HP/CS agreements and other types of consumer finance, lowering the cost of HP/CS credit for consumers and increasing its availability'.