Britain’s financial watchdog says car dealers and finance companies are working together to overcharge car buyers by more than £1,000 a deal.
Now the Financial Conduct Authority (FCA) says it is going to crack down on the firms involved if they don’t clean up their acts.
The regulator has been investigating car finance since concerns were expressed last year that personal contract purchase plans for new cars could be mis-sold.
It is concerned 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.
FCA spokesman Jonathan Davidson said: “We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves.
“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments.
This is simply not good enough and we expect firms to review their operations to address our concerns.”
Last year the National Association of Commercial Finance Brokers (NACFB) said they were concerned that consumers would be paying considerably more interest with a PCP than they would if they chose hire purchase.
Personal contract purchase plans have replaced hire purchase as the most popular way of buying a new car.
But with PCP the customer only leases the car, they never own it.
The attraction of the method is that the consumer can afford a more expensive model with lower payments than by using traditional methods which buy the car outright.
However, under the terms of the leasing deal, the vehicle must be returned to the dealer at the end of the agreement unless the purchaser makes a final so-called balloon payment.
Over the odds
Alerted by the NACFB’s concerns the FCA decided to investigate the market by mystery shopping lenders and 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.
In their final report the FCA 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.
In particular, we are concerned about the widespread use of commission models which link the broker commission to the customer interest rate and allow brokers wide discretion to set the interest rate.
This gives rise to conflicts of interest and creates strong incentives for the broker to charge a higher interest rate.”
The report suggested that brokers should examine their policies in light of the report’s findings with a view to amending their policies and procedures.
It also issued a warning, saying: “Where we have identified concerns through our findings, we will follow up with the individual firms. Where necessary, we may consider supervisory or enforcement action. We may also ask firms to report to us on progress in addressing issues.”
Financial trade body the Finance and Leasing Association has claimed the FCA report had been based on largely out of date information.
In a statement it said: “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.”
She urged consumers to ‘visit reputable franchised retailers and shop around before agreeing any finance deals’.