PCP car loan - were you mis-sold? | Gladstone Brookes

PCP car loan – were you mis-sold?

Were you mis-sold a PCP car loan?

Tens of thousands of UK motorists could be owed compensation for mis-sold car finance loans known as personal contract plans (PCP) after a two year investigation found some motorists were paying £1,100 over the odds on their finance.

The Financial Conduct Authority (FCA) investigated the way PCPs were sold and found that 560,000 could have paid £300 million more in interest than they needed to.

Concerned

In its final report the City regulator said it was concerned with the way in which the deals on loans were drawn up could be manipulated by dealers to pay themselves a higher commission as the finance broker.

The report said: “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.

Conflicts of interest

“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.

“It is not clear to us why brokers should have such wide discretion to set or adjust interest rates, to earn more commission, and we are concerned that lenders are not doing enough to monitor and reduce the risk of harm.”

Findings

The report found:

  • There was a conflict of interest and ‘potential for significant consumer harm’ due to the correlation between higher interest rates and commission rates.
  • A high proportion of firms were found to have commission arrangements which could incentivise dealers to arrange finance at higher interest rates for their customers. This dealer discretion over interest rates, particularly in Difference in Charges (DiC) models, created a strong association between the amount of interest charged and the commission received by the broker.
  • Concern that the link between customer interest rates and credit scores will be broken, resulting in lower risk customers being charged high interest rates and higher risk customers being priced out of affordable credit.
  • Identified that approximately 560,000 customers have paid a total of £300 million more in interest annually as a result of DiC commission models.
  • The FCA reminds firms of their obligation to ensure that appropriate systems and controls in place to manage the risks associated with incentive schemes (see below).

Concern

Concern was also expressed that customers were not given sufficient time to consider the deal and its possible implications or given enough information about alternative methods of finance to allow them to make a considered decision.

Unacceptable

An FCA spokesman added: “We found some motor dealers are overcharging unsuspecting customers over £1,000 in interest in order to obtain bigger commission pay-outs for themselves…. We estimate this could be costing consumers £300 million annually.

This is unacceptable.”

Banning

The regulator is now working on interventions to change the way the system works which could lead to changes in the consumer credit rules and either banning the commission models or lowering broker discretion.

It is understood it is not planning to enforce punishment over past or existing loans but say consumers have the right to make a claim if they feel they have been mis-sold.

They will also be writing to firms in the sector reminding them they must ‘take reasonable steps to establish and maintain appropriate and effective systems and controls to reduce risks and ensure compliance with regulatory requirements and standards’.

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