New Regulatory Regime for Personal Contract Plan (“PCP”) Providers
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The Government recently published the Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 which is aimed at regulating the PCP sector in Ireland for the first time.
Personal Contract Plans – more commonly known as “PCPs” are a type of finance agreement which are used for the hire and eventual purchase of motor vehicles. A PCP is similar to a standard hire purchase agreement, with one major difference being that by the end of the PCP, the consumer still owes a considerable amount.
Typically there are three elements to a PCP. Firstly, the buyer is required to pay a deposit of between 10% and 30% of the purchase price of the car; they then pay a portion of the purchase price by way of a series of monthly instalments (often 36 instalments), and the buyer is then required to pay a lump sum (or balloon payment) at the end to clear any outstanding balance.
Rise in Popularity of PCPs
PCPs have becoming increasingly popular in recent years and have managed to operate outside the scope for the regulatory regime that applies to more traditional types of credit.
According to the most recent Central Bank of Ireland data on PCPs, at the end of 2019 there was in the region of €1.1 billion in outstanding PCP credit – marking a sizeable increase on the position in 2014 when the level of outstanding PCP credit stood at €0.17 billion. Far less is known about the amount of PCP finance provided by “non-banks”. According to the Central Bank, as of the end of 2017, “non-banks” had outstanding PCP credit amounting to €293 million.
Absence of Regulatory Framework
The absence of consumer-focused regulation of the PCP sector prompted Minister Donohoe to commission former senior civil servant Michael Tutty to carry out a review of the PCP market and regulatory structure, with a particular focus on the adequacy of consumer protection. Mr Tutty was also tasked with making recommendations to address any identified gaps. Mr Tutty produced his report in September 2018, and while he found “no evidence so far of significant consumer detriment arising from PCPs” he went on to suggest that “consideration should be given to legislation providing for an authorisation system for PCP providers”. That the PCP sector be regulated was also proposed by the Competition and Consumer Protection Commission in its earlier (March 2018) Report on the sector.
Key Aspects of the New Legislation
The Bill will serve a number of key objectives. Firstly, it will implement the “Tutty Report” recommendation that the relevant provisions of the Central Bank’s Consumer Protection Code (and in particular, the provisions which require financial entities to carry out a pre-contract suitability and affordability assessment) should apply to all the providers of PCP agreements to consumers. The Bill will also provide that the level and framework of consumer and other regulatory protection which currently applies to the provision of credit in the form of cash-loans by existing authorised entities, will now apply to all the providers of credit including PCP providers. The Bill will also ensure that in circumstances where there is a future sale or legal assignment of a credit or other financial accommodation agreement, appropriate consumer protection measures will continue to apply.
Once enacted, the new legislation will extend the existing Central Bank regulatory remit and authorisation requirements in respect of “retail credit firms” and “credit servicing firms” to all providers of credit, hire purchase (including PCP) and consumer hire agreements. Providers of indirect credit to consumers will also be required to secure authorisation.
Once the new authorisation regime is introduced, these firms will need to make an application to the Central Bank for authorisation and such credit providers and servicers will then be required to comply with Consumer Protection Code as well as other Codes and Standards that are administered by the Central Bank.
The effect of being authorised and being required to adhere to the terms of the consumer Protection code will mean that firms will be required to assess the suitability of the product for the consumer and firms will also be obliged to assess the ability of the borrower to repay the debt over the duration of the credit agreement.
The new legislation also provides that the APR in respect of a credit agreement or hire-purchase agreement must not exceed 23%. Under the proposed legislation, the Minister for Finance will have the power to request the Central Bank of Ireland to collect and publish statistical data on credit, hire-purchase (including PCP) and consumer-hire agreements.
Existing firms which will for the first time be required to secure authorisation as a “retail credit firm”, will be required to submit an application for authorisation within three months of the coming into operation of the relevant provisions of the Bill. Those firms will be permitted to continue to conduct business until the Central Bank of Ireland has granted or refused authorisation.
Timeframe for Enactment
Minister Donohoe has indicated that it is his expectation that the Bill will be enacted before the end of 2021 – which suggests that the Bill may be afforded priority in the legislative calendar. Also worth noting is the fact that the Bill currently contains a commencement provision which means that it cannot come into operation until the Minister signs a commencement order.
The Financial Services Regulatory Team at RDJ will be keeping a close watch on the progress of this legislation and can advise on its implementation and help PCP firms prepare for the Central Bank authorisation process.