Personal Contract Plans: the Irish Market
Having originated in the USA and UK, Personal Contract Plans (PCPs) were introduced in Ireland towards the end of the last decade, during the financial crisis, when car manufacturers sought to address a significant drop in sales. In addition to lowering the demand for new cars this also led to a scarcity of “younger” second hand cars in the Irish market as consumers increasingly held on to their cars for longer than had been the case before. By the time many consumers came to trade in, the value of their cars was not enough to provide a sufficient deposit on a new car. PCPs can address the circumstances in which consumers do not have enough trade-in value to use their car as a deposit for a new one as they generally involve a relatively low upfront deposit, low monthly repayments and a large payment at the end. In effect, the largest financial burden on the consumer is shifted to the future.
In recent years this type of car finance has become increasingly popular with consumers and traders. Prompted by the growing popularity of this type of finance, the large sums of money involved and the complexity of the agreements, on 17 July 2017, the CCPC announced that it would undertake a study of the PCP car finance market.
The study was conducted in order to compile evidence in relation to:
- the size and characteristics of the PCP market;
- the experience of consumers in the market as well as their ability to understand PCP agreements; and
- the current protections available to consumers under the Consumer Credit Act 1995, as amended, referred to henceforth as the CCA 1995.
In order to fully understand the operation of the PCP market and ensure that any recommendations are evidence based, the CCPC carried out the following research steps:
- Extensive desk-based research was undertaken into the range and types of PCPs that are available to consumers in Ireland.
- An analysis of relevant legislation was conducted.
- Detailed questionnaires were issued to all financial institutions that underwrite PCP finance. The data which was returned allowed the CCPC to compile, for the first time, primary data relating to the number and value of PCP finance contracts issued in the State.
- Detailed questionnaires were issued to all of the car dealer credit intermediaries on the CCPC register, resulting in 85 responses, 61 of which were from car dealers who arrange PCP finance.
- In-depth interviews were conducted with a number of the larger car dealerships in the State.
- Amárach Research was commissioned to undertake a series of focus groups with consumers to examine their understanding and perceptions of the PCP product, their experiences of the PCP sales process and their views on the suitability of the product.
- In addition to a review of the information provided by contacts to the CCPC’s consumer helpline, the CCPC requested submissions from individual consumers regarding their views of and experience with PCP products. A total of 17 submissions were received and nine in-depth interviews were conducted.
Recommendation: Monitor the development of the sector
As noted in the report, PCPs are a significant part of the car finance market. The CCPC collected data on a voluntary basis for the purposes of this study. Consideration should be given to how this data should be collected on a statutory basis in order to track and monitor the development of the market. There is some volatility evident in the development of the PCP market which would emphasise the need for ongoing monitoring of both the size of the sector in terms of the numbers and values of PCPs underwritten, but also the penetration in the second-hand car market.
Recommendation: Ongoing consumer information and education
The evidence collected for this study will further inform the information that the CCPC currently provides to consumers in relation to PCP agreements. As a result the CCPC has begun a full review of its information, taking account in particular of the findings of the consumer research, the PRICE Lab research and more generally how consumers make decisions in this market. The CCPC will complete this review by the end of April 2018.
The CCPC should also continue to conduct public awareness initiatives to highlight key issues, including:
(a) That PCPs may be a cost effective way of driving a new car, but not necessarily owning a new car
(b) That the GMFV should not be seen as a deposit for a future car
(c) That paying a large deposit on a PCP can have implications for consumers who want to roll their PCP at the end of the agreement, in terms of them having a smaller deposit than for their first PCP, leading to higher monthly repayments
(d) That consumers have the right to terminate a PCP agreement under section 63 of the CCA 1995
The absence of mandated suitability and affordability checks creates a potential risk in the PCP market for inappropriate lending by providers and over-indebtedness for consumers. It is the CCPC’s view that the growth in the market for PCPs should be considered in the context of not just current default and arrears rates but in the context of potential future risk which may arise in the event of either a fall in consumer sentiment and/or a significant fall in car resale values.
A number of options are proposed to enhance the protections afforded to consumers;
Recommendation: Review or amend Consumer Credit Act 1995, as amended
The Consumer Credit Act 1995, as amended (CCA 1995), outlines the legislative framework for hire purchase agreements. The view of the CCPC, explained in detail in Chapter 4, is that a PCP is likely to be considered a type of hire purchase agreement. However, the concept of a PCP is not expressly defined in the CCA 1995, as it was not an established form of car finance when the CCA was enacted, or last reviewed in 2003. It would appear, given the significance of the PCP market, that it would be timely for the CCA 1995 to be reviewed to ensure its suitability in relation to this specific, new form of car finance.
Recommendation: Update regulatory regime to increase consumer protection
Given the considerable complexity attached to PCP and the regulatory imbalance when compared to other forms of car finance, it is recommended that PCP be brought within the scope of the Central Bank’s Consumer Protection Code. This would have the effect of mirroring the protections that are currently afforded to consumers who purchase other types of financial products, including suitability and affordability checks and general requirements around the provision of information.
Section 8H of the CCA is mentioned as one of legal bases upon which the Central Bank issues its Consumer Protection Code. Consideration should be given to how the protections under the Code could be extended to consumers of hire purchase agreements including PCP contracts. Separately the Central Bank has functions for the purpose of the CCA 1995, including “to publish codes of practice setting out conduct relating to agreements which the designated provisions apply, in order to secure transparency and fairness in relation to the terms of those agreements and the conduct of agents dealing with consumers under those contracts”. If a revised Consumer Protection Code were adopted, it could include provisions relating to the obligations of those who are engaged in the provision of PCP financing. Any breach of those provisions committed by a regulated financial service provider would be subject to the Central Bank’s administrative sanctions procedure as set out in Part IIIC of the Central Bank Act. Otherwise the possibility of the Central Bank issuing a standalone code of practice under the CCA 1995 should be given further consideration.
Recommendation: Implement interim arrangement to enhance consumer protection
A transitionary or interim arrangement could be considered where the Central Bank instructs regulated entities underwriting PCPs to only underwrite PCPs where the credit intermediary can demonstrate that it has introduced standardised affordability checks, communicated relevant information in a clear, fair and non-misleading manner and provided a standard information sheet. However, it is acknowledged that such a regime would likely to be a voluntary measure.Return to Market Studies