An in-depth report into Personal Contract Plans (PCPs) in Ireland by the Competition and Consumer Protection Commission (CCPC) finds that to date, PCPs have worked well for the vast majority of traders and their customers, but warns that factors such as declining second-hand car values could have a negative impact, particularly in relation to consumers having some equity left at the end of the agreement which they can use towards another new car. It highlights the lack of a regulatory structure and warns that further protections are required for this market.
The huge growth in popularity of PCPs as a means to purchase vehicles is reflected in the CCPC’s finding that approximately one third of new car purchases by consumers in Ireland are now funded in this way. The average PCP contract value in 2016 was just under €25,000.
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. While data for 2017 suggests the total amount of credit will be slightly lower, this is mainly due to the reduction in new car sales in 2017.
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.
The report assessed consumers’ understanding and experiences of the PCP market, finding in general a positive situation with defaults and arrears levels at very low levels. However it notes that due to 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 CCPC report highlights the concern that unlike other financial products, 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.
- 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
The full CCPC report – Personal Contract Plans: the Irish Market can be viewed here.