A quick Google search of the term ‘excess mileage’ brings up myriad results, the vast majority of which relate to PCP.
Some are straightforward explanations of a core part of the PCP product. Others are styled as more of a warning about how these charges could be a nasty sting in the tail for those who, for whatever reason, are not aware of their agreed mileage limitation or the charges for exceeding them. Other observers take a different angle altogether, with many consumer forums asking the question: are excess mileage charges even legal?
The right to voluntarily terminate a hire purchase agreement was written into the Consumer Credit Act (CCA)1974, in Sections 99 and 100, before PCP was a product available in the UK, and therefore does not have any reference to some of PCP’s requirements – excess mileages included.
While mileage charges are not spelled out, Section 99 (2) states termination “does not affect any liability under the agreement which has accrued before the termination”.
Further, Section 100 (4) states that, if the debtor has contravened an obligation to take “reasonable care” of the goods in question, they can be charged.
There is a lack of definition around what constitutes reasonable care, and this has led to a legal grey area over what this constitutes. As far back as 2010, Motor Finance ran an external comment, stating: “A client took on a new contract hire car with me and explained he was going to voluntarily terminate [VT] his existing four-wheel drive in order to take on the new car. His agreement was a regulated PCP agreement, and he had paid over 50%.
“The leasing company accepted the VT and the car was returned. However, his return mileage on the car was considerably higher than the pro rata contract mileage. When he received an excess mileage charge relating to the excess, he refused to pay as there was nothing in the CCA hat related to the excess mileage charges when VT-ing a hire purchase or conditional sale agreement.
“When this was pointed out, the lessor, under the threat of having the case referred to the Financial Ombudsman Service [FOS], decided to drop the charges.”
On Google, there have been scores of consumer forums making very similar arguments over the past several years. In 2017 and the start of 2018, the noises got louder, including a BBC radio programme on the issue that was broadcast at the start of the year.
However, those in the industry that Motor Finance speaks to are confident that VTs sit comfortably with the CCA. Adrian Dally, head of the Finance & Leasing Association (FLA), for example, notes: “In terms of the legal arguments, what the law does say is that there is an obligation under an HP PCP agreement for the user of the car to take ‘reasonable care’ of it.
“It’s reasonable care, not reasonable condition. What a mileage charge does is make what is a fairly vague term – ‘reasonable care’ – and make it very clear, transparent and unambiguous to every consumer.
“In terms of the CCA, the HP provisions do not say you only do what it says in the act. What it does say is that terms and conditions in consumer credit agreements may have additional terms and conditions beyond those set out in the act, so long as they are consistent with the provisions in it. Spelling out what reasonable care means through a mileage charge is clearly consistent with the requirement to take reasonable care.”
The link between a car’s mileage is well known, as cars gradually suffer wear and tear through use. According to cap hpi, a Ford Focus 1.0 125 EcoBoost Zetec 5 Door will be worth £8,050 after three years and 30,000 miles. If the car did 60,000 miles in that time, it would be worth £6,700, while a three-year-old model with 100,000 miles on the clock would be £5,225.
Not aiding the situation is a lack of case law surrounding the area. The FOS, however, has made a number of rulings on the topic over the years. Looking through past FOS cases, decisions consistently see no contradiction between CCA and excess mileage charges.
One such example is case reference DRN6806562 from 2014, in which an Alphera customer VT-ed an agreement, and was charged a pro rata excess mileage. In its ruling, ombudsman Roslyn Rawson said: “Section 99 (2) of the Act confirms that charges accrued before the end of the agreement are payable. So, I consider that any excess mileage charge is payable.”
More recently, in another case (DRN5827140), a customer complained about excess mileage charges from PSA Finance UK after he VT-ed his agreement. According to the report, the customer had received legal advice that he was not obliged to pay for excess mileage following a VT.
Although PSA contested on the grounds that the customer had not completed a VT, and instead the agreement had ended naturally (something the FOS agreed with), ombudsman Robert Collinson noted: “I don’t think that makes any difference to the outcome of his complaint, because VT doesn’t end any liability which has already accrued under a finance agreement. So, he would still have been liable for the excess mileage charge anyway.”
This ruling was issued in February 2017. In the same month, another ombudsman, Mark Hollands, wrote in his conclusions for another case: “I don’t consider it necessary to go into further detail here about exactly what is set out in the CCA 1974 about termination. But in summary, it does allow a business to charge for excess mileage on VT.”
The FOS does not constitute case law, however, according to Mel Chell, partner at Shoosmiths: “While the FOS decisions are not binding, they are persuasive. If I was representing a finance company on this point at court, and there is no case law, I would be saying ‘look at the FOS decisions’.”
Dally, who used to work at the FOS, agrees, adding: “There has never been a challenge to the way law has been applied to PCP in the UK. In cases that have gone to the FOS challenging whether a consumer has to pay a mileage charge if they VT, the ombudsman has always upheld the customary practice, on the basis of a reasonable interpretation of the law.
“Bear in mind that in a judicial sense, the FOS is seen by the higher courts as an expert in the financial services field. The higher courts defer to the FOS’s jurisprudence.”
What to do?
Chell offers some practical advice for PCP lenders: “In terms of self-help, lenders need to be speaking to their dealer groups and making sure they’re aware this is a bit of a hot topic. They need to make sure at the point of sale that the customer understands the implications of signing a mileage provision.
“It is worth making sure dealers understand this is likely to become an issue. Once claims management-type consumer representatives get on a bandwagon, it can gather momentum.”
Chell adds that firms need to defend the principle robustly, adding that PCP remaining a viable product requires some knowledge of residual values.
If a lender cannot know how many miles the car is going to do, predicting residual values becomes impossible. As such, she recommends defending the right to charge excess mileage in the case of VTs robustly.
Dally, for his part, says the FLA is extremely confident that if this was ever taken to law courts, the decision would side with lenders. He says: “We’re very confident that if this was tested in the law courts it would back up our long-standing interpretation here.
“Again, you need look no further than the FOS on this. They ae the people to whom the courts defer, and their decisions have been consistent. We are confident we are on solid ground here.”