knowledge | 16 November 2018 |
Personal Contract Plans under Scrutiny
A recent report (the “Report”) on the personal contract plan (“PCP”) market commissioned by the Minister for Finance (the “Minister”) has recommended that measures be put in place to improve consumer protection. The Report follows previous analyses of the PCP market conducted by the Competition and Consumer Protection Commission (“CCPC”) and the Central Bank of Ireland (“CBI”).
What is a PCP?
A PCP is a form of financial contract for the purchase of a (usually new) car or other vehicle. A typical PCP involves three parties: the consumer (as purchaser), car dealer (as seller/credit intermediary) and financial institution (as PCP provider and owner of the vehicle). The contractual arrangements generally require the consumer to:
- pay an initial deposit of between 10% and 30% of the value of the vehicle
- make monthly repayments for the duration of the term (typically 36 months)
- at the end of the term, either make a “balloon payment” to purchase the car, or hand the car back to the owner.
In practice, car dealers will often allow (and encourage) consumers to roll-over the PCP contract and to apply any equity that the consumer has acquired in the existing car (from their initial deposit and monthly repayments) towards the deposit for a new PCP for a new car.
Two key attractions of a PCP from a consumer’s perspective are: first, it allows them to “purchase” a car which could they not otherwise afford; and secondly, the consumer can hand back the car to the financial institution in lieu of making the final bullet payment. These attractions have led to the popularity of PCPs since their introduction to the Irish market.
Report and Recommendations
The Report focused on the current PCP market and regulatory structure, particularly referencing recent reports by the CCPC and CBI. The principal purpose of the Report was to provide an analysis of the adequacy of consumer protection in relation to PCPs and to make recommendations on how any gaps in consumer protection should be addressed.
The CCPC’s earlier report had raised concerns regarding the complexity of PCPs as a consumer product. Based on its research, the CCPC was doubtful as to whether consumers fully understood how PCP financing arrangements work especially with regard to the risk of losing their “equity” if the price of the car decreased more than anticipated under the contract. It made a number of recommendations which have been considered by the Report.
Among other things, the Report recommends that the Minister should consider the following:
- CCA: The Minister should obtain legal advice to confirm whether PCPs fall within the definition of “hire purchase agreement” (or alternatively the definition of “consumer hire agreement”) in the Consumer Credit Act 1995 (“CCA”). If this is not confirmed by legal advice, the CCA should be amended so that PCPs are either regulated under the CCA’s hire purchase provisions or on a separate basis.
- CPC: Interestingly, the Report recommends that relevant sections of the CBI’s Consumer Protection Code (“CPC”) should be applied to PCP providers and hire purchase providers. Hire purchase is currently expressly excluded and this would, consequently, constitute a significant broadening of the CPC’s application. The primary motivation for extending the CPC in this way is to apply the consumer-protective suitability and affordability assessment processes set out in Chapter 5 of the CPC to consumers availing of PCP and hire purchase arrangements. The Report does note that amending primary legislation may be required to provide the CBI with the relevant supervisory authority and powers, not least of all because not all providers of finance by way of hire purchase are currently regulated financial services providers.
Softening the above consumer-protective suggestions somewhat, the Report also notes that the Minister would need to balance the increased consumer protection provided by the suggestions against the additional regulatory compliance costs that would be imposed on PCP and hire purchase providers (particularly given that there is not yet evidence of consumer harm from such products).
The Report’s recommendations suggest that serious thought is being given to changes to existing consumer protection legislation. This may lead to increases in regulatory compliance requirements for providers of PCP and/or hire purchase agreements. While legislative change is unlikely to be swift, all providers of PCP and hire purchase agreements should monitor developments to ensure that the terms of their products and the implementing processes are updated as needed in good time.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.