Irish regulator, The Competition and Consumer Protection Commission (CCPC) has published a detailed report analysing the Personal Contract Plan (PCP) car finance market. Prompted by the growing popularity of this type of finance, the large sums of money involved and the complexity of the agreements, the CCPC began a study of the market in July 2017. The report contains the first public analysis of the PCP market in Ireland, explores consumer experiences to date and assesses the consumer protections in place for those who sign up to PCP contracts.

Speaking today, Isolde Goggin, Chairperson of the Competition and Consumer Protection Commission said, “The purchase of a car is a very significant financial commitment for any consumer. PCPs were introduced into Ireland by some car manufacturers during the financial crisis to facilitate the purchase of new cars. In recent years this type of car finance has become increasingly popular with consumers and traders. In addition to the first assessment of the size of the PCP market, our report highlights how complex these products are. In this context, we also undertook a detailed assessment of the current protections available to consumers”.

PCP agreements are now used to finance approximately one-third of new car purchases by consumers in Ireland. The CCPC’s report found that the amount of finance that has been extended to consumers under PCP agreements was €805 million in 2016, an increase of 65% from the previous year. Data collected for 2017 indicates that the number of PCP agreements and the total amount of credit will be slightly lower than for 2016. This is mainly due to the reduction in new car sales in 2017.The average PCP contract value in 2016 was just under €25,000. The report also measured the growth of the PCP market for second-hand cars. In 2016, 12% of PCPs were used to purchase second-hand cars. The number of PCPs issued for second-hand cars in 2016 was more than double that of the previous year.

As part of its study, the CCPC assessed consumers’ understanding and experiences of the PCP market in a number of different ways. Broadly, those who have used this type of finance reported positive experiences. In addition, defaults and arrears levels are very low. Based on the research overall however, the CCPC is of the view that because of the considerable complexity inherent in PCPs, there must be a doubt as to whether consumers can fully understand how they work, particularly the implications at the end of the agreement. For example, in focus groups commissioned by the CCPC, most consumers believed that their car’s value would exceed the amount that they owed at the end of the term and that therefore they would have equity to use as a new deposit. However, this may not be the case should market values decrease.

The product features of PCP agreements are unique and different to other forms of car finance such as personal loans, as a large proportion of the cost is deferred to the end of the agreement. Under the current regulatory framework, those arranging PCP products are not required to check the affordability or suitability of the consumer before selling them a PCP product. As a result, a significant amount of credit has been extended to consumers, with no requirement for standardised affordability or suitability checks. This contrasts with the requirements placed upon finance providers when selling other financial products, for example when a consumer takes out a loan to buy a car.

Speaking about the CCPC’s report, Isolde Goggin said; “Our research shows that to date, PCPs have worked well for the vast majority of traders and their customers. This is very positive, but we must understand why this has been the case. It is the CCPC’s view that the incentives for both consumers and traders have been the same; there is an ongoing relationship which encourages traders to help consumers purchase a new car and have some equity left at the end of the agreement which they can use towards another new car. This however may not continue into the future, for example, if second-hand car values decline significantly. Aligned incentives are not a substitute for a regulatory regime which ensures that consumers are protected in the long term. In the context of the size of the market and the complexity of the products the current consumer protections mean that there is potential for significant consumer detriment to occur in future.

The CCPC is of the view that further protections are required in this market. Furthermore we believe that, before significant issues emerge, policymakers should consider the market and assess what actions could help safeguard consumers into the future. The CCPC has made a number of recommendations for policymakers to consider in this regard.”

 CCPC Recommendations

  • Recommendation: To help consumers understand PCP finance, the CCPC should review the information it provides to consumers in light of the findings of this report and continue to conduct public awareness initiatives.
  • Recommendation: Consideration should be given to how data should be collected on a statutory basis in order to track and monitor the development of the PCP market.
  • Recommendation: The growth in the PCP finance market should be considered in the context of potential future risk. Options to enhance the protections afforded to consumers include;
    • A review of the Consumer Credit Act 1995, to ensure its suitability in relation to this specific new form of car finance.
    • An update of the regulatory regime to bring PCPs within the scope of the Central Bank’s Consumer Protection Code, thus mirroring the protections of other similar financial products.
    • As a potential interim action, the Central Bank could instruct regulated entities underwriting PCPs to only do so where the credit intermediary can demonstrate that it has conducted standardised affordability checks, communicated information clearly and provided a standard information sheet.

A copy of the CCPC’s report is available here.

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