There are few things more enjoyable than picking up the keys to a new car and personal contract plans (PCPs) have made it a whole lot easier to drive away in a desirable car that seemed previously out of reach.

The growth in popularity of PCP contracts has led to concerns that customers are now securing finance terms without too many questions being asked – to the extent that some predict this could be the next big financial scandal. The Financial Conduct Authority is now probing the sector, with its report due out early next year.


The FCA has said: “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”.

This is a big market, the amount borrowed to buy new cars has trebled over the past eight years and is now over £30 billion, with much of this tied up in monthly PCP payments.

So where are the problems and what can risk managers learn from this? As with PPI, it seems there is a lack of customer understanding and insufficient comparisons being made with alternative finance plans.

PCPs usually involve affordable monthly installments, typically for three years, and at the end of this, the car can be traded in for a new one or purchased. If purchasing, the final ‘balloon’ payment is usually a significant sum, which is perhaps why only around 20% of customers choose to keep the car.

The regulator will be looking at PCP sales techniques and it may find some problems, not least because sales staff often have targets to reach on finance agreements as well as car sales.

Equally, customers are usually far more concerned about the monthly payment figure than wading through comparisons, terms and what happens three years down the line.

Following its report, the regulator may want to see better questioning and more stringent procedures – namely akin to a mortgage before car finance can be agreed. They may also insist on better consumer education on how PCP works.

For example, the penalties for exceeding agreed mileage limits and returning the car in a poor condition may need to be better explained. Other restrictions can include servicing at an agreed dealership, and these can be more expensive than local garages.

Claimant lawyers are already beginning to make their own investigations into this area and as PPI claims dry up, PCPs are being seen as a potentially lucrative new avenue.

The regulator has also stepped in and the alarm bells are now ringing…