Dealing with an unregulated firm or product could leave you with nowhere to turn to if things go wrong.
Most of us expect to have somewhere to turn for redress if things go wrong with a loan or investment. This isn’t always the case though. When you borrow money or invest in something, you usually have certain rights if you run into problems with the product – or with the firm which has provided the product.
There are also usually rules in place to reduce the chances of something going wrong.
To be covered by these safeguards, however, the firm or product must be regulated by the Central Bank – or authorised by another suitable body. There are a number of investments and loans which are not regulated and which fall outside the remit of the Central Bank. It’s therefore crucial that you find out if you’re dealing with a regulated financial firm or product before committing your money to something – and if not, what (if any) recourse you have should things go wrong.
PCP car finance
About one in three new cars are bought using a type of car finance known as Personal Contract Plans (PCPs), according to a report published by the Competition and Consumer Protection Commission early last year.
Despite the high take-up of PCPs, this type of finance is not regulated. Consumers could easily run into difficulty with PCPs – or not fully understand what they’re getting into. “When compared to other consumer financial products, PCP is particularly complex,” said the consumer watchdog in its report. “Because of the considerable complexity inherent in PCPs, there must be a doubt as to whether consumers can fully understand how they work, particularly the implications at the end of the agreement.”
The monthly repayments under a PCP are often low – which could lead an individual to believe that the car finance is more affordable than it actually is. However, you usually have to pay a deposit at the start of the PCP and there is also typically a large balloon payment at the end of the agreement for those who wish to keep the car. There may also be extra fees and tricky conditions built into a PCP. The CCPC has described PCPs as one of “the least flexible forms of finance”. When you come to the end of a PCP deal, you could find yourself owing more than the car is worth – or struggling with debt. You could also find yourself in a position where you’ve repaid most of the car finance, but end up losing the car because you can’t afford to make the final repayment.
PCPs are largely available from car dealers. As PCPs are unregulated, there’s no obligation on the finance company offering you a PCP to assess whether the arrangement is suitable for you or not – or to check if you be able to repay the finance. Were you to be applying for a regulated loan, however, these checks must be done.
The CCPC believes PCPs should be brought within the scope of the Central Bank’s consumer protection code “given the considerable complexity attached to PCP finance and the existence of a regulatory imbalance compared to other car finance”. (It is this code which requires that checks on loan suitability be conducted for consumers) “This would have the effect of mirroring the protections that are currently afforded to consumers who purchase other types of financial products,” said a CCPC spokesman.
A recent report commissioned by the Finance Minister has also called for legislation to be reviewed to ensure that those who buy cars through PCPs are protected. “There is no evidence so far of significant consumer detriment arising from PCPs,” said the report. “However, potential problems have been identified and it may be useful to deal with them before they materialise.” The Central Bank said it is “currently engaging with the Department of Finance” about the recommendations made in this report.
Another source of potential problems with PCPs arises from their omission from the Central Credit Register – the database which banks and other lenders use to check your credit record before offering you a loan. Should a lender not be aware that you owe money through a PCP, it may lend you more money than would have been the case had it been aware of the PCP. This, in turn, could see you struggling with debt as you may take on too many loans at the same time. However, PCPs and hire-purchase agreements will be included in the Central Credit Register from the end of June. A PCP may suit you if you’re buying a car, and the CCPC has found that the number of people who fall behind on PCP repayments is very low.
All the same, it is important that you carefully consider a PCP before signing up to it – and that you understand your financial obligations throughout and at the end of the arrangement.
You can make a complaint to the Financial Services and Pensions Ombudsman (FSPO) if you run into problems with a PCP.
PCPs aren’t the only unregulated loans available here – some high street stores offer loans [typically so a consumer can finance the purchase of the retailer’s goods] which may not fall within the remit of the Central Bank or CCPC.
Peer-to-peer lending
With peer-to-peer lending, you lend money to businesses and earn interest on the money lent. The returns made on peer-to-peer lending can beat the interest earned on deposit accounts. This has made peer-to-peer lending attractive to some of those seeking alternatives to deposits.
However, peer-to-peer lending is riskier than traditional deposit accounts and it is not regulated either. Should you lend to a business which runs into financial difficulties, you may not get your money back.
Peer-to-peer lending is a type of crowdfunding (where money is raised from a large number of individuals or organisations to fund a business, project, personal loan or other need).
One way to protect your money should you opt for peer-to-peer lending is to lend to a variety of businesses. Doing so reduces your exposure to any one business or sector – which should in turn reduce the amount of risk you take on. Also check what safeguards the peer-to-peer lending platform has in place for those who use it.
Linked Finance is one of the biggest peer-to-peer lending platforms in Ireland. In the UK, it is authorised and regulated by the UK regulator, the Financial Conduct Authority (FCA) and it says that it voluntarily applies FCA standards in Ireland.
Linked Finance said that it “completes a rigorous credit evaluation on each loan request received”.
“Only businesses adjudged creditworthy by our analysts will be permitted to seek funding on the platform and a loan grade [to indicate the potential risk of a loan] is provided alongside each loan request,” said a spokesman for Linked Finance.
Less than 1pc of loans borrowed through its platform end up in default, according to Linked Finance, which added that it has a debt management process in place “to maximise recovery for lenders”.
In his Budget speech last October, Finance Minister Paschal Donohoe announced plans to start to regulate crowdfunding activities in late 2019 or in 2020.
In the meantime though, anyone engaging in peer-to-peer lending or other crowdfunding should be aware that they can not fall back on the Central Bank should something go wrong.
As crowdfunding is not regulated by the Central Bank, none of the bank’s codes of conduct, compensation schemes (such as the Investor Compensation Scheme), or consumer protections apply to it.
Neither can you make a complaint to the FSPO as it only investigates complaints made against regulated firms.
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