From Consumer Redress to Regulatory Reform: The Challenge of PCP Mis-selling and Consumer Credit Law

This summer’s Supreme Court ruling in Close Brothers Ltd v Johnson has given some clarity on the car finance mis-selling scandal, but not the kind of clarity that consumer advocates had hoped for. The Court rejected the idea that car dealers arranging finance generally owe fiduciary duties to borrowers, and held that non-disclosure of broker commissions does not automatically render a credit relationship unfair. Instead, unfairness under section 140A of the Consumer Credit Act 1974 depends on factors such as the size of the commission, the way it was presented, the circumstances of the consumer, and other relevant factors.

The Financial Conduct Authority has confirmed that it will proceed with a redress scheme covering both discretionary commissions, which were banned from 2021, and non-discretionary commissions that were central to the most recent litigation. While this scheme will arguably deliver compensation to some borrowers, there is a risk, I suggest, of repeating a familiar regulatory cycle in which consumer credit mis-selling is remedied through compensation, however, the deeper structural problems in the market remain unaddressed.

This is therefore a moment for us all to look not only at redress, but at the Personal Contract Purchase market itself and to ask whether it is consistent with the protective aims of UK consumer credit law.

PCPs and Their Consequences

Personal Contract Purchase agreements have become the dominant method of financing new cars in the UK and are widely used in the second-hand market. They are attractive because they offer low monthly payments, achieved by deferring a large portion of the purchase price into a so-called ‘balloon’ payment at the end of the term. This model has proven particularly attractive at a time of stagnant wages, rising living costs and persistent inflation, when households prioritise immediate over long-term affordability. The design makes ownership theoretically possible, but in practice most consumers cannot pay the balloon. Instead, they often return the car and enter a new PCP. Industry data suggest that more than three quarters of customers never achieve car ownership. For many households, PCPs have become less a pathway to buying a car than a mechanism for perpetual borrowing and debt servicing.

Four Key Gaps in Consumer Protection

When viewed through consumer credit law, four weaknesses stand out.

First, the termination right under section 99 of the Consumer Credit Act 1974 is largely ineffective in PCPs. That provision allows borrowers to end a regulated hire purchase or conditional sale agreement by returning the goods after paying at least half the total price. However, with PCPs, so much cost is deferred that many borrowers do not reach the halfway point until very late in the term, if at all. Attempting to exit earlier usually leaves them responsible for a substantial shortfall without any meaningful equity. So, although the termination right is formally available, it rarely gives consumers a practical way out of PCPs.

Second, the Act’s protections on repossession under section 90 fail to secure consumer safety in practice. Once a borrower has paid one third of the total price, repossession normally requires a court order. Yet PCPs inflate the total so far above the amounts paid early on that many borrowers remain below the one-third threshold until toward the end of the contract. In consequence, for much of the term, lenders can repossess without judicial oversight, exposing consumers to aggressive enforcement.

Third, the pre-contractual rights embedded in the Act assume that disclosure leads to informed consumer choice. But empirical research shows that PCPs are widely misunderstood. Many borrowers, including those with higher levels of education, fail to grasp how balloon payments, mileage caps, and servicing obligations interact. Disclosures may comply with the law, but very often do not translate into real understanding or informed consent.

Fourth, the regulation leaves serious gaps in car finance pricing and affordability. PCPs are not subject to statutory caps on interest rates or APR, unlike short-term high-cost credit. Subprime borrowers frequently face APRs above 20-25% (e.g. in the Supreme Court’s Johnson case, the commission paid to the dealer was equivalent to 25% of the advance and 55% of the total charge for credit). At the same time, lenders are required to assess affordability only for monthly payments, not for the balloon. The effect is that vulnerable borrowers are drawn into agreements they cannot realistically complete and, lacking the resources or confidence to dispute them, remain caught in recurring cycles of refinancing.

Why Redress Alone Is Insufficient

Compensation for past misconduct is important, however, I argue that if reform stops there, the underlying problems will persist. The UK has seen this before with pensions, endowment mortgages and payment protection insurance, each followed by extensive redress yet with the commercial incentives that created the problems largely untouched. The car finance scandal is not just about commissions. It reveals how consumer credit law can fall short when credit products are structured in ways that undermine the very protections it is meant to provide.

A stronger regulatory response would address the structure of PCPs directly. Affordability assessments should take account of the balloon payment as well as the monthly instalments, testing whether the contract as a whole is sustainable. Termination and repossession rights should be revisited and reformed to work effectively in agreements that defer such large sums to the end. Policymakers should also consider whether interest rate or APR caps are needed to prevent excessive costs.

Most importantly, the case for reform is especially strong because cars are not optional luxuries. In many parts of the UK, private transport is essential for access to employment, education, healthcare and childcare. If consumers are forced into perpetual credit arrangements to secure such a basic necessity, then consumer credit law must recognise that reality. Genuine financial autonomy requires that consumers can obtain essential goods like cars without undermining their financial independence.

Conclusion

The Supreme Court’s judgment has narrowed the scope of redress by rejecting broad fiduciary claims and limiting unfairness to specific circumstances. The FCA’s scheme will provide compensation, but the more important question is whether consumer credit law can prevent harm in the first place. PCPs expose significant weaknesses: termination and repossession rights that fail to operate effectively, pre-contractual duties that do not translate into understanding, and affordability rules that overlook the balloon payment.

Unless reform tackles the structural weaknesses of PCPs, I fear that the current scandal will simply replicate the trajectory of past mis-selling cases, substituting financial pay-outs for genuine market change.

Asta Zokaityte is a Senior Lecturer in Law at Kent Law School, University of Kent.