Car finance – the next PPI?

Could personal contract plans for car finance soon become the new PPI?

The UK’s financial watchdog is sufficiently concerned about the way the finance is being sold that they have launched a special investigation.

Over the odds

The Financial Conduct Authority (FCA) will be looking into whether or not British motorists have been paying over the odds by using the ‘fashionable’ method of car finance.

Personal contract plans, known in the industry as PCPs, offer cheaper monthly repayments than the more traditional hire purchase agreement, but unlike HP the borrower never actually owns the car.

Interest only

A PCP is effectively an interest only loan where the buyer is basically covering the cost of the car’s depreciation.

There is the chance to purchase the car at the end of the finance deal, but the concern is that only a small fraction of customers can afford to do that.  Instead they go back to the dealership to pick out a new model and take out another PCP.

£40 billion a year

Almost 90% of the UK’s £40 billion a year car finance industry is now carried out through PCPs.  In terms of borrowing it is second only to the UK mortgage market.

Now the FCA is concerned that consumers may not be getting the best possible deal and not being given enough information to make a sound judgement.


It is understood the investigation will look at who uses the products and how they’re sold, including whether or not sales staff carry out sufficient checks on customers to ensure they can afford the monthly repayments.

As with all other forms of borrowing, the concern is that, if proper affordability checks have not been carried out, in the event of an economic downturn and/or a rise in interest rates many borrowers may not be able to meet their monthly payments.

Irresponsible lending

In a statement the FCA say: “We are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry.

“We will conduct an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance.”


The FCA’s action follows a report by the Bank Of England’s financial policy committee which has highlighted potential risks from the rapid growth of consumer credit in car sales.

Dealership car finance was found to be the fastest expansion of consumer credit in recent years, surpassing both credit cards and personal loans.


Compliancy Services advises the motor industry on financial regulations and spokesman Andrew Smith said: “The culture of the business has to change and, from the evidence I have seen, there are some things going wrong.

“The majority of customers have no idea who their financing contract is with, even though the rules state the buyer has to know who they are dealing with, along with everyone else involved in the chain.”


The FCA investigation is expected to report next year, but the watchdog has already warned that it will ‘intervene’ if it finds evidence of wrongdoing.

If the regulator finds that consumers have lost out because of mis-selling by dealerships, borrowers could be in line for millions of pounds in compensation.