Car Finance Mis-Selling Scandal

Summary

• A recent Financial Conduct Authority investigation discovered widespread evidence of mis-selling on all types of vehicle financing options.
• Previous scandals have lead to the destruction of shareholder value in the sub-prime lending market.
• Car finance lenders could have large hidden complaints costs.

Mis-selling a car finance deal means that the consumer has either received poor advice, wasn’t given all the information about a deal or the risks weren’t made clear to them. It usually leads to customers ending up with a deal and a car that doesn’t suit their needs or financial means. There have been reports of mis-selling on all types of vehicle financing options. There are many reasons why a car finance deal may have been mis-sold and consumers could be due a refund.

Car Finance Summary

There are two main kinds of car finance. With a hire purchase agreement, the consumers pays for the car over a set timescale, usually between two and five years. The monthly repayments are set in advance and the customer is the vehicle’s registered keeper, responsible for insurance and maintenance, but they do not own it until the loan is fully repaid.

PCPs are more popular but are more complex because they factor in the vehicle’s depreciation during the term of the agreement (usually three to four years). The consumer has to give an estimated annual mileage that will affect the expected future value of the car. Monthly payments are lower than with an HP agreement because the depreciation is factored in, but they have to pay a balloon payment at the end of the contract if they want to own the car. If they don’t come up with the extra cash, they can hand back the keys and walk away.

Car Finance is the second most popular type of household borrowing, after credit cards, and are held by about 6.8 million people. The Finance & Leasing Association said it represents most car finance companies, and that 93 percent of new cars are bought on finance provided by its members. Effectively almost all drivers now use credit to buy, or hire, their cars.

Consumers can get car finance from divisions of high street banks such as Lloyds and Santander; specialist lenders dedicated solely to car finance; or in-house finance provided by manufacturers such as BMW, Ford, Mercedes, and Volkswagen.

What Is Financial Mis-Selling?

The lender has an obligation to inform the customer what is involved in their car finance deal and what it can and can’t do so that they are paying for a deal that suits the customer and what they were looking for. If the lender hasn’t done this then the customer may be eligible for compensation.

Whether the customer has lost money or not, if the finance deal isn’t right for them as a result of mis-selling then they can make a complaint to stop the lender from doing this again in the future.

Some financial companies have been misleading about the extra costs involved in the contract or how risky the deal was. If the customer was aware of the disadvantages or risks of a deal because the lender told them before the purchase, then they won’t be compensated.

Financial mis-selling is, unfortunately, becoming increasingly common, particularly with Personal Contract Purchase car finance deals.

PCPs and hire purchase agreements for vehicles are now some of the most complained about financial products.

Since April 2020 the Financial Ombudsman Service (FOS) has counted disputes about car finance agreements separately to other types of hire purchase loans and has registered 11,101 complaints.

Between July to September this year it was the sixth most complained about financial product, with 1,491 complaints. Some 44 percent of assessed complaints were upheld, compared with an average uphold rate of 38 percent across all financial products.

Among the rulings were disputes over hidden charges and finance companies that approved big loans for new cars for borrowers who had low incomes or were unemployed.

Some finance firms have been the subject of more complaints than high street banks. Volkswagen Financial Services, which provides finance for Audi, Seat, and Porsche, was the most complained about, being the subject of 1,159 FOS complaints in the first half of this year, with 54 percent of those that were assessed upheld. Subprime car finance lenders like Moneybarn, owned by Provident financial, and Advantage Finance, have also lent millions to customers who can’t get a loan elsewhere. Many of those might be classed as unaffordable as the individuals involved had low incomes or had bad credit history.

Who has the mis-selling scandal affected?

A recent Financial Conduct Authority investigation discovered widespread evidence of mis-selling on all types of vehicle financing options.

Customers who have bought a new car with a Personal Contract Purchase (or PCP) deal may be at most risk of having been mis-sold a loan in this new scandal. These PCP deals can be complicated and involve a lot of small print in the contract.

Consumers have been taken advantage of by dealers who have told them that they are getting a better deal or that a PCP deal is a much more cost-effective option than a Hire Purchase deal. They may be caught out by a PCP contract due to the balloon payment at the end. A PCP deal works by making the cost of the loan equal to the amount the car is expected to depreciate over the course of the contract.

For example - if a car is initially valued at £15,000 at the beginning of the contract and the dealer expects it to depreciate to around £8,000 at the end of the deal, then the borrower will pay the difference over the length of the contract. If they enter into a 2-year PCP deal, then they will pay £7,000 in monthly instalments over that time. If they then wish to keep the car at the end of the contract, they make a balloon payment. The balloon payment is equal to the depreciated value of the car (also known as the guaranteed minimum future value, or GMFV) - in this case, £8,000. they'll pay this on top of the monthly payments they've already made.

There is usually nothing wrong with the PCP deal - it all comes down to how the dealer sells it, and how clearly they lay out the terms. Dealers have been known to discuss the profit consumers can make from PCP deals, but profit is very much the wrong term to use. This ‘profit’ is just the money the customer has already paid to cover how much the dealer expected the car to depreciate.

Lenders

Obviously, this may impact all car finance lenders. However, due to the added chance of having unaffordable claims against them, subprime lenders are particularly vulnerable. Due to this Moneybarn, owned by Provident Financial Holdings, Inc. (PROV), is particularly at risk. Advantage Finance, owned by S&U (SUS), is another prominent sub-prime finance lender. However the latter generally sell their product using fixed commissions for brokers, which the FCA prefer, so are less exposed to other types of mis-selling.