January 22
The rise and fall of PCP: what could it mean for the legal industry?
Industry Insights
Amy Mellors
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At Flex Legal, we have extensive experience in managing multi-party and large class action teams for organisations such as Leigh Day. With the unfolding PCP case, we’re keeping a close watch on the latest developments. Here’s what you need to know:
In a landmark ruling, the Court of Appeal has significantly strengthened the position of consumers who were mis-sold car finance agreements, particularly in cases where the dealerships were acting as the credit brokers and commission details were not fully disclosed. The full extent of the scandal is expected to be larger than PPI, with firms expected to foot a multibillion-pound compensation bill.
What is PCP?
Personal Contract Purchase (PCP) is a popular car financing option that involves the consumer paying a deposit, followed by regular payments based on the finance company’s prediction of the depreciation in the value of the car over that period. At the end of the contract, the consumer has the choice of:- Paying the previously agreed price of the predicted value to keep the car (‘balloon payment’);
- Or giving the car back.
Despite its popularity, concerns have emerged about customers not being given adequate information about terms and interest rates.
The Court of Appeal ruling
The decision was made following the hearing of three conjoined appeals against FirstRand Bank Ltd and Close Brothers Ltd in October 2024, all involving PCP loans and car hire agreements. In each instance, car dealers assisted the claimants in obtaining a loan from a third party, whilst the finance company was paying them “secret” commission payments. This lack of transparency led to dealerships incentivising loans with higher interest rates to increase their commission, despite promising to find a loan provider that best met the needs of each consumer. As a result, consumers were left paying more for their loans than they would have with a different lender.The Court of Appeal held that the car dealers owed their customers a fiduciary duty as the credit broker to inform them of the receipt of commission. In each of the cases before them, it was unlawful for car dealers to receive a commission from a lender providing motor finance to a customer, unless it was properly disclosed to the customer, and they gave informed consent to the payment. The Court of Appeal upheld all three appeals in favour of the claimants, and sought the return of these commission payments, plus the appropriate interest.
Implications
The case specifically concerns vehicles purchased with finance between April 2007 and January 28th, 2021, meaning millions of drivers could be owed compensation and firms have been left fearing a £30 billion bill in potential payouts.In anticipation of a surge in claims, the Financial Conduct Authority (FCA) warned motor finance firms in April 2024 to ensure they maintain adequate financial resources. The FCA urged firms to assess their ability to manage the increased costs of complaints and, if necessary, to cover the expenses of resolving those claims. In light of the recent judgement, this is now a critical consideration.
The ruling has wider implications for other consumer finance agreements involving undisclosed broker commissions. Products like electronics and caravans could fall under similar scrutiny.
The extent of the scandal cannot be underestimated. Some analysts estimate the total cost to the car finance sector could reach anywhere between £8 billion and £13 billion. Whilst consumer advocate Martin Lewis has suggested that the FCA investigation could lead to one of the largest compensation payouts in history, rivalling the scale of the PPI scandal, which cost UK banks over £50 billion.
This financial burden represents just one challenge; delays in handling claims are expected to cause significant operational and compliance difficulties. Banks may need to allocate additional staff to manage the increased volume of claims and litigation.
Flex Legal can help relieve the burden of handling the volume of claims by providing law firms with interim paralegals and legal professionals. Hiring on an interim basis could be a fast, cost-effective and results-driven approach to manage and resolve claims relating to PCP.
Supreme Court appeal
The Supreme Court has granted permission for FirstRand Bank and Close Brothers to appeal against the landmark ruling. Although a date has not been set for the hearing, they are expecting a decision by summer or autumn next year. This is following a pleading letter from the FCA to expedite the hearing in the hopes of reducing the impact of the judgment on the motor finance industry and consumers alike.After the Supreme Court case, regardless of outcome, what is next? This website details some of the ongoing issues the Banks can expect to face.
Facing a high volume of PCP claims? Flex Legal can provide the interim paralegals and legal professionals you need to manage claims effectively. Get in touch today and discover how we can help you mitigate these complex challenges.