The Financial Conduct Authorities (FCA) Motor Finance Review has finally arrived. The eagerly awaited and long overdue investigation into auto finance has revealed what many in the industry had predicted.
The FCA estimates consumers have been overcharged by as much as £300m annually by dealerships driving up interest payments on PCP to secure higher commissions.
We now know PCP isn’t working; it’s too complex and not transparent.
The fact that 90% of all new cars sold through dealerships are on PCP, means claims firms are rubbing their hands at a scandal that could be as big as PPI.
Car buyers are getting overcharged £1,000 at the start of a PCP agreement, and then at the end of it they find themselves in negative equity with a big balloon payment to settle.
No one would choose to get a car this way, customers want the freedom to get a new car every few years without the threat of balloon payments.
That’s why more and more customers are choosing to lease vehicles via PCH.
Our own research has shown that customers who lease a vehicle save on average £4,424 over PCP.
The fact that HMRC has just decided that monthly PCP payments will now need VAT charged to them, could not have come at a worse moment for anyone trying to make the case that this notoriously complicated finance model is right for 90% of their customers.
Of course, consumers will have been well aware that dealerships take a commission.
What they probably didn’t know is just how much interest rates and payments can be inflated in the interests of the seller.
Our entire industry, and its regulatory bodies need to address our systems and processes, to put a stop to this malpractice that’s taking place in far too many dealerships.
Nothing in the FCA’s report will come as a surprise to anyone in the sector.
What remains unclear is how the sector will change, but it must.
Our industry needs to think very carefully about its future. We have to regain the trust of the customer.
To achieve this, we need to embrace greater transparency. We’ve all got to put the customer before commission and it’s only a matter of time before full disclosure is mandatory and telling customers how much commission they’re paying is commonplace.
Based on these FCA findings, I don’t think this would be a bad thing.
I’ve always believed that what’s best for the customer is best for business and it’s that ethos that I’ve built the Autorama Group on, from day one, and why we’ve committed to not sell cars using PCP.
If dealerships continue to take advantage of car buyers, then quite rightly they’ll stop buying cars and start to consider other ownership options.
There’ll be those that say our industry has enough on its plate at the moment with the seemingly never-ending speculation surrounding Brexit, and we should sweep this report under the carpet. But the customer is just not going to care for our excuses.
Regardless of how the sector reacts, it’s highly likely that we’re going to see an influx of PPI style claims.
These claims will continue to erode trust in a sector that’s already struggling to come to terms with whatever form Brexit takes.
What I believe, is that whatever happens in the future, it will be the most transparent, fair and ultimately affordable car finance models that will win.
The days of balloon payments and negative equity are numbered.
Author: Andy Alderson, chief executive of the Autorama Group