It has been just over six months since the second flurry of news coverage of the alleged mis-selling of motor finance, including suggestions it could be the next PPI. With regulators’ attention caught, media attention now seems to have turned to excess mileage charges – but is it really the end for these? TLT’s Russell Kelsall and Alanna Tregear think not.
In May 2017, the Financial Conduct Authority (FCA) launched a review into the car finance market.
The FCA wants to develop its understanding of the products and how they are sold, to assess whether the products cause harm to consumers and whether the market is functioning as well as it could.
An update on the FCA’s work on motor finance is expected in the next couple of months.
The PRA’s view
In July 2016, the Prudential Regulation Authority (PRA) issued a statement on consumer credit, including motor finance. The PRA has, however, recently said motor finance lenders are using a “reasonably prudent approach” to setting guaranteed future values (GFVs).
For PCP deals, lenders will include a GFV. This is based on an estimate of the vehicle’s value at the end of the agreement and the vehicle being in a certain condition.
The GFV takes into account, among other things, the mileage the vehicle will have covered.
The agreement will normally include both a total mileage limit and an annual mileage limit. The higher the mileage limit; the lower the GFV.
Charges and concerns
To avoid being out of pocket if a vehicle is returned with excess mileage, lenders will normally include an excess charge, based on each extra mile.
There is a similar approach for PCH deals where the owner will estimate the vehicle’s residual value at the end of the term.
Excess mileage charges, and wear-and-tear charges, have been the subject of press articles and blogs for some time.
The Financial Ombudsman Service (FOS) regularly receives complaints from customers saying excess mileage charges and other charges were not made clear to them, or were not discussed at all. The FCA’s review will look at the way in which these charges are explained and applied.
BBC Radio 4’s Money Box programme recently broadcast a feature about excess mileage charges when a customer ends an agreement under the voluntary termination rights in all regulated PCP agreements. The programme suggested that the legality of such charges is unclear.
What does the CCA say?
If a customer has the right to end the agreement under Section 99(1) of the Consumer Credit Act 1974 (CCA), they can do so if they give written notice to the lender.
But termination of the agreement does not affect the customer’s liability which has accrued before termination (see Section 99(2)).
If the customer has paid less than one-half of the total amount payable, they must also pay the difference between what they have paid and one-half.
If they have paid more than one-half, they must pay any sums due by the time of termination (see Section 100(1)).
The customer must also pay an amount if he has failed to take reasonable care of the vehicle (see Section 100(4)).
While it will depend, in part, on how an agreement is drafted, there are good grounds to say excess mileage charges are recoverable by motor finance lenders, either because they are sums (a) which accrued before termination (under Section 99(2)) and/or (b) to reflect the vehicle’s reduced value because the customer has failed to take reasonable care of it by driving it more miles than he agreed at the start of the agreement.
It would be a very curious conclusion if a customer could avoid excess mileage charges by exercising a right of voluntary termination under Section 99(1) of the CCA, but have to pay them if they simply decided not to exercise their option to buy the vehicle under the terms of the agreement.
The provisions of the CCA were drafted in a very different time, when hire-purchase agreements often involved a customer paying equal monthly repayments.
In those cases, excess mileage charges were unnecessary.
Customers now want, and demand, flexibility, but this should not mean lenders have to bear the risk, and cost, of a customer exceeding the mileage limit agreed at the time of entering into the agreement. The customer will have chosen the mileage limit.
So far, the FOS generally agrees with lenders, but to reduce the risk of any adverse decision, lenders may wish to revise their documentation (including the adequate explanation) to make it absolutely clear what a customer will pay if they voluntarily terminate the agreement before the final payment has fallen due.