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Why is the FCA trying to change how cars are sold?


Why is the FCA trying to change how cars are sold?

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The UK’s Financial Conduct Authority (FCA) is aiming to change the way cars are sold in the UK, by changing how the interest rates in car finance agreements are set.

If successful they believe they can save UK consumers over £165 million per year.

Who is the Financial Conduct Authority?

The FCA, is the UK’s independent financial regulator, and has recently acted against other consumer credit markets, like the payday lending market, which was occupied by firms like Wonga, and the rent to buy market, occupied by firms like BrightHouse. The FCA has demonstrated it has the power to disrupt markets, if it believes they are dysfunctional and not serving the best interests of consumers.

Its new proposal is to stop the car finance industry from allowing brokers to set their own interest rates when their customers buy a car.

The problem is, at present, brokers can decide how much interest you pay when you take out a finance agreement, as this creates a commission for them.

The problem is many consumers think the broker is getting the best deal for them, but in fact, is possibly being incentivised to hike up the interest rates to get the best deal for themselves.

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What has the FCA found out about the Car Finance Industry?

The new proposal by the FCA has been made after it completed its own research into the car finance industry and found:

  • The way that lenders are rewarding brokers may be resulting in harm for consumers on a significant scale;
  • Giving brokers a wide discretion to set the interest rates on consumers finance agreements creates a potential conflict of interest, as brokers may set higher interest rates to increase their own commission; and
  • They are not satisfied many firms are complying with regulations and carrying out proper affordability checks before offering finance to people wanting to buy a car.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:

‘We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance. By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.’

How has Car Finance Agreements changed?

It is now believed that over 90% of all new cars in the UK are being bought using car finance agreements, such as Personal Contract Purchase Plans (PCP) and Hire Purchase Agreements.

This has led to a substantial increase in recent years in the number of new cars being purchased and seen car finance debt become the fastest-growing type of personal debt in the UK since 2015.

The growth in the use of car finance has also changed our attitude towards debt, with a recent Auto-Trader Survey finding that 98% of those who buy cars using PCP agreements, actually feel like they own the car, despite the fact they don’t until its fully paid off.

Twenty per cent of Millennials (those born between 1981 and 1996) are now paying as much for their car as they are in rent. Half also say their car is their next biggest payment after their mortgage or rent.

Most revealing, however, is one third would rather use PCP finance agreements, even if they could afford to just buy the car, as they can upgrade the car after they have paid off half the full amount owed under the agreement.

Car Finance Agreement Complaints are Increasing

However, the experience is not always a pleasant one for everyone, with the Financial Ombudsman Service finding that complaints regarding car finance agreements have quadrupled since 2014.

There is also the danger that if you default on a PCP or Hire Purchase agreement, your car may be repossessed and you may become liable for the full amount owing, losing the right to give the car back after half the payments have been made.

However, it cannot be denied that the benefits of PCP agreements have been welcomed by many consumers since 2015, with many benefiting from lower monthly payments for higher-spec cars.

The new style agreements, that are based on traditional hire purchase agreements, differ in that monthly payments are now calculated on how much the car depreciates in value over the lifetime of the agreement and not on how much it costs. This has led to monthly payments being lowered, with many able to afford cars they couldn’t under more traditional car finance agreements.

Creditfix is the UK’s leading provider of personal insolvency solutions and a leading provider of advice on personal debt issues. To speak with an advisor about personal debt, including car finance agreements, call 0808 2234 102.


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