Have you paid commission on your agreement you did not know about?
PCP is a credit agreement taken with a commercial finance company to purchase a car from a car dealer who is also the credit or loan broker.
This is how PCP works and this is how it is unique from other loan agreements: Your Total Loan Amount (the total amount you borrow) is the value agreed between you the sales company and the commercial finance company to purchase the vehicle less any deposit Your Total Repayment Amount over the agreed term does not discharge the Total Loan Amount.
Your Total Repayment Amount is calculated as Total Loan Amount + interest on the total loan amount – Balloon Payment
The balloon payment is also known as the guaranteed future value. This is the agreed future value of the vehicle at the time of the last payment of the Total Repayment Amount. This valuation is agreed upon at the time the PCP is taken out agreed and signed by the parties. When the total repayment amount is discharged you pay the balloon payment as one final but large payment and you own the car. At the end of the total repayment amount period if the vehicle is worth more than the balloon payment then the difference can be used as equity to offset against another PCP.
If you hand the car back, you will still have paid interest on the Total Loan Amount over the agreed period within the Total Repayment Amount, and the finance company remains the owner throughout the term of the PCP agreement.
In October 2019 the Financial Conduct Authority produced a report wherein it stated:
“The way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale. Some customers are paying significantly more for their motor finance because of the way lenders chose to remunerate their brokers.”
Interest, Commission in PCP and The Law as we see it.
The Consumer Credit Act 1974 provides a collection of rules protecting consumers from financial institutions.
One of the rules in the Act is section 140(a) which gives a Court powers to reopen credit transactions if it decides that because something is done or not done by or on behalf of the creditor the relationship was unfair to the debtor.
Where the borrower is not told or even where the borrower is told commission is paid by the lender to the broker but not how much, this may amount to unfairness.
On the question of non-disclosure of commission as a whole or the amount (even where the financial and conduct of business rules do not mandate disclosure) unfairness may be found by a Court when taking into account the characteristics of the borrows and the information available to the borrower.
A significant inequality of information between lender and borrower is capable of making their relationship unfair. It is liable to limit the borrower’s ability to make an informed choice.
Furthermore, where commission is declared but the amount withheld this can constitute unfairness as the borrower is unaware as to how much of the repayment is consumed by commission.
It may be that if a borrower is informed they would have questioned this and shopped around for a cheaper option.
Turning to the potential issue of lack of advice by a broker the problem could be that it is the broker that recommends the lender they are the borrows broker and the only intermediary dealing directly with the borrower.
It is an essential requirement of s140(a) of the Act that the unfairness of the relationship should arise from something is done or not done on behalf of the lender. The act views the broker as the creditor’s agent or someone who is answerable in law either under the act itself or otherwise. The broker must give advice as to the suitability of any product that is a function they must perform in the borrower’s interest as the borrower’s brokers. To do otherwise amounts to unfairness The Lender is not subject to this obligation of advice the broker is but both are subject to unfairness as a stress test of their activities in terms of disclosure of commission.
Of particular relevance to the PCP is s140 of the Consumer Credit Act 1974 and the case of Plevin v Paragon Personal Finance Limited. Although this case referred to the hidden commission in a Credit Agreement in respect of an insurance premium undoubtedly the principles are very relevant to the findings of the Financial Conduct Authority and PCP.
Any armchair lawyers out there can watch this decision and understand the rationale behind it in the judgement as brilliantly set down and read out by Lord Sumption in this famous supreme court case of Plevin.
Unfairness Identified In PCP Agreements
We have identified some but are not limited to the following examples of potential unfairness.
The FCA identified that commission was calculated within the interest payment made by the customer to the commercial finance company. A proportion of that interest was then paid by the finance company to the dealer broker in accordance with a behind the scenes agreement between the dealer broker and the lender.
This arrangement was not disclosed to the consumer specifically including the amount paid effectively paid by the consumer. This commission inflated the total value repaid for no apparent benefit to the consumer.
Consumers were potentially denied the opportunity to identify cheaper products.
Customer confusion could amount to unfair representations explained by the broker. The lender’s Equity for example the reference to the difference between the balloon payment and the value of the car at completion of the repayments is an enticing term which in reality may have little commercial attraction to the borrower. An advertising narrative is persuasive if not in the borrowers best interest.
The Rate of Interest. Taking into account the Bank of England bank base rate of 0.1% how proportionate is the agreement rate on a PCP relative to this rate. Was for example the broker acting in its own best interests and not in the interests of the lender.
Credit Risk, do any documents you received contain any evidence as to how interest was calculated. For example your creditworthiness, a higher risk borrower can expect to pay more interest above the average as there is evidence as to risk to the lender.
So these are just some examples of unfairness in PCPs that may have been present in agreements within the past 10 years.
Requirements for PCP claim:
To find out whether the following applies, please look at the main HP/PCP agreement.
1. The Agreement needs to be in your personal name, so it will likely be a ‘Regulated agreement’. It will say something along these lines: ‘This Agreement is Regulated by the Consumer Credit Act 1974’.
2. Interest rate is equal to or above 6% OR credit borrowed is over £10,000.00. Only one of these needs to apply.
3. PCP/HP agreement taken out within the last 10 years.
4. For current and ongoing PCP/HP agreements, you need to have had the agreement for a minimum of 12 months for the claim to be worth pursuing.
If you do not know whether the above applies, please send a copy of your finance agreement and we will let you know.
What is a Housing Disrepair Claim?
If you rent your home, then your landlord is responsible for making repairs on the property. If they fail to do so, then you’re eligible to make a housing disrepair claim against them for any damages, including personal injury, which may arise as a result of the disrepair.