Posted: 22nd March 2016

Vehicles purchased using finance products accounted for a massive 81% of the new car market in 2015, latest Finance and Leasing Association figures show. A large percentage of these transactions were made via Personal Contract Purchase, or PCP.

Due to PCP’s low monthly payments, it appears an attractive method of obtaining a new vehicle. However, the benefit of low monthly cost comes with caveats, and this is the crux of whether a PCP deal is truly good value and able to deliver good outcomes for a customer.

The FOS revealed an 18% rise in motor finance complaints (including PCP deals) in 2014, which provides some evidence that this area of the market may not always be producing the outcomes expected of it.

Concerns around the suitability of past business and current sales are understandable, with PCP having been such an explosive commercial success. Are firms therefore ensuring that customers’ understanding of PCP products (and the associated risks) is sufficient?

Examining the potential Regulatory issues

It’s not uncommon for PCP to be talked about as a product which holds ‘risks for the unwary’, and many poor customer outcomes are likely to be a result of these risks (and their implications) not being made explicit at the outset.

Alongside this, a lack of evidence that a firm firstly, considered the risks to customers, and secondly, ensured risks were fully understood may result in regulatory scrutiny and potential issues in the future.

Firms looking to assure themselves over the current situation in their customer base, or improve future iterations of their products and processes, should consider some key areas of risk:

1.Annual mileage limit

Do customers understand the implications of under-quoting their required yearly mileage when obtaining a quote? What is the process within your firm for explaining this risk? Consider bringing it well and truly out of the small print (if this is the case within your firm) and into the conversation at point of sale.

2.Fair wear and tear

How clear is your policy on fair wear and tear? What do you categorise as a chargeable item when the vehicle is returned? The challenge for firms is how they show that this was explained adequately at the point of sale. Ensuring there is evidence that your wear and tear policy was explained to the customer will protect you against claims of inadequate information.

3.The term of the agreement

The lower monthly payments of five year PCP agreements can appear to be a great deal to customers, but have they considered the reality of the five year deal? Was their original desire a new car in three years? Lower monthly payments are always attractive, but perhaps not so attractive in hindsight if the customers’ overarching objectives are not met.

4.Termination or settlement

What does your overall arrears policy look like? What are the escalation routes for arrears customers who are experiencing genuine vulnerability? It’s likely that vulnerable customers will rely on this area of your policy to provide them with good outcomes.

5.Balloon payments

Gaining full ownership of the vehicle at the end of the agreement could mean customers need to borrow again – this is especially likely if it is not sufficiently explained to them and they fail to provision for this extra cost. This is an elementary feature of the product, but firms should still ensure it is made absolutely explicit to consumers and evidence that this has been the case.

6.Old vehicles used as a deposit

Do customers understand that they will require a further deposit if they want to enter into a new PCP agreement? Without an asset to use on a further deposit, they may well be unable to afford to move seamlessly onto their next vehicle, and may therefore feel they have suffered undue detriment.

7.Large deposits, guaranteed return value and the risk of losing equity

Monthly payments on a PCP deal should be similar to the depreciation of the car. If a customer puts in a large deposit, monthly payments will be artificially lowered, but it’s possible they will not get equity back at the end of the agreement to cover the deposit they put in. This should be a factor in pre-sales conversations, as a typical consumer may assume that putting down a larger deposit can only bring benefits.

8.Effects on the used car market

The number of used PCP vehicles being remarketed means options, condition and mileage are critical in maintaining residual value. If supply outstrips demand, residual values of vehicles could fall, leading to the risk of shortfalls for customers where future vehicle value isn’t truly guaranteed. This could mean a poor experience for more customers at the point of buying their vehicles outright, or for the firm due to a decrease in the number of customers opting to buy.

What to take from this; Product Suitability

The regulator expects firms to take an iterative approach to product design, and this means that your firm must be looking to examine, control and augment its products and processes for the good of customer outcomes. They should also be thinking about how they discern whether products are suitable for the consumers being recommended them.

Effective quality assurance and a robust approach to regulatory compliance are important here. For these functions to work well, firms must make sure their teams:

  • Contain the required experience and knowledge
  • Are empowered to escalate reservations over risk to senior-level decision makers
  • Have the full backing of senior-level decision makers when it comes to taking action

Lastly, evidencing the activity you undertook to ensure good outcomes for customers is imperative. Even in the absence of regulatory scrutiny, firms should be assessing and gathering what they have in terms of evidence of their customer-centric approach.

Some effective methods of evidencing of this approach include:

  • Undertaking root cause analysis (in the event something is known to have gone wrong)
  • Outcomes testing that tests customers’ true understanding of the product and associated risks for a period after the commencement of the deal (this should be a study of customers moving through the product lifecycle, and should be ongoing and feed into product design)
  • Reviewing your financial promotions (both the terms and wording) to ensure they are clear, fair and not misleading
  • Assessing cultural factors, such as sales reward structures, as contributors to potential customer detriment

These activities will help you identify any issues being driven into your customer base, enabling you to address them and circumvent future customer detriment. Firms may well find challenges in performing some of this activity within current business-as-usual capacity, and so they must plan their resources carefully. Ultimately, though, this activity can ensure that PCP delivers good customer outcomes, provides the firm with long-term assurance over the commerciality of its product, and helps avoid the need to remediate customers.

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