CHAPTER ONE – INTRODUCTION: TYPES OF CAR FINANCE AGREEMENTS
In the context of car purchasing, a customer usually purchases the car from a car dealership and the car dealership offers to find car finance on behalf of the consumer. Car dealers (brokers) must generally be an authorised representative for these purposes if they are offering credit to a prospective customer[1]. Upon being authorised, the car dealer will need to demonstrate that it can comply with the FCA’s Principles of Business, comply with the FCA’s Handbook Rules and the FCA’s Threshold Conditions[2].
Most car finance agreements will generally be credit agreements regulated by the Consumer Credit Act 1974. A consumer credit agreement is defined under the Consumer Credit Act as an
“agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides credit of any amount[3]. Credit can include a cash loan and any other form of financial accommodation[4].
For agreements after 1 April 2014…..
A regulated agreement can include a hire agreement or a credit agreement”.
For regulatory purposes, the Financial Conduct Authority, who took on the regulation of motor finance and consumer credit firms in April 2014, adopts the wording of Article 60B of the Regulated Activities Order[5] in its definition of consumer credit lending as “entering into a regulated credit agreement as lender, or having the right to exercise, the lender’s rights and duties under a regulated credit agreement”.
For common law purposes, the definition provided by s.8(1) of the CCA 1974 has been applied by the courts when defining what a consumer credit agreement is[6]. The case of Diamond v Lovell referenced the definition of credit in the book, Goode Consumer Credit Legislation as:
“credit [is] extended whenever the contract provides for the debtor to pay, or gives him the option to pay, later than the time at which payment would have been earned under the express or the implied terms of the contract”.[7]
In the context of car finance, most agreements are “restricted use agreements”[8] which usually involves the consumer purchasing a vehicle pursuant to a hire-purchase or PCP agreement. The key feature of a restricted use agreement is that the borrower is not free to use the credit for any purpose they wish.
For the purposes of car finance agreements, the main types of agreements are:
Hire-purchase agreement
This is where the customer pays for the finance by way of instalments over a fixed period of time. Some agreements offer a “balloon payment” whereby the customer pays a final amount in order to become the owner of the vehicle (normally through the option of “an option to purchase fee”). In such a scenario, lenders will sometimes offer a guaranteed future value for the vehicle which is linked to the balloon payment. Conversely, conditional sale agreements procure that the borrower automatically owns the goods once the final payment has been made.
PCP (personal contract purchase) agreement
Usually a customer would pay a deposit and then pay the finance agreement by way of monthly instalments (usually based upon an amount the lender thinks the car will lose in value over the period of the agreement less the customer’s deposit). At the end of the agreement, the customer can either pay a final balloon payment or they can use what equity they have built up in the vehicle to put towards as a deposit for the purchase of a new vehicle. In these types of agreements, there will sometimes be annual mileage restrictions attached to the agreement.[9]
Lease-hire
Under such an agreement, the customer agrees to rent the vehicle and return it at the end of a specified period.
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1,2 The FCA’s full credit authorisation regime applies to all “high-risk” consumer credit lending activities which include credit brokerage. The FCA’s threshold conditions would require the car dealership to show that it is “ready, willing and organised” by demonstrating that it has appropriate resources, a business model, effective supervision, having its offices within the United Kingdom and is suitable to be authorised: see the FCA’s threshold conditions, Paragraphs 2D to 2F of Schedule 6 FSMA 2000, The Financial Services and Markets Act 2000). See also Chapter Two below.
[3] S.8(1) of the Consumer Credit Act 1974. See also Article 60B of the Regulated Activities Order 2001
[4] S.9(1) of the Consumer Credit Act 1974
[5] The Financial Services and Markets Act 2000 (Regulated Activities Order) 2001
[6] Durkin v DSG Retail Ltd and another [2014[ UKSC 21. See also Diamond v Lovell [1993] 3 All ER 1
[7] Goode Consumer Credit Legislation 1999, vol 1, para 433, Diamond v Lovell at p572
[8] See s.11(a)-(b) of the CCA 1974 which states that:
A restricted-use agreement is a regulated consumer credit agreement –
- To finance a transaction between the debtor and the creditor, whether forming part of that agreement or not, or
- To finance a transaction between the debtor and a person (“the supplier) other than the creditor……
(c) An agreement does not fall subsection (1) if the credit is in fact provided in such a way as to leave the debtor free to use it as he chooses, even though certain uses would contravene that or any other agreement.
[9] A statutory consideration such as s.100(1) CCA 1974 which may apply to such mileage restrictions in a voluntary termination scenario.