After several decades of widespread use, the car finance industry’s ‘discretionary commission finance’ model was officially prohibited on January 28. New legislation introduced by the Financial Conduct Authority placed a formal ban on the controversial commission model, which collectively saw vehicle buyers paying more than £300 million in excess charges when purchasing vehicles each year.
Previously, dealers have had the freedom to select and impose their own preferred rates of interest. Under the new legislation, they will be prohibited from overcharging car buyers with inflated rates of interest most are not even aware they are paying.
“Some motor dealers are overcharging unsuspecting customers over £1000 in interest charges in order to obtain bigger commission payouts for themselves,” commented director of supervision for retail and authorisations at the FCA, Jonathan Davidson.
“This is unacceptable.”
Mr Davidson’s sentiments were echoed by Bea Lovestone at the Financial Ombudsman Service, who spoke of countless complaints being received regarding excessive commissions and elevated interest rates.
“We have around 200 complaints from consumers unhappy about the levels of commission they’ve paid on their car finance agreements,” she said.
“They complain of ‘commission manipulation’, where the credit provider sets the range of interest and the dealer or broker then sets the consumer’s rate within that band. Others claim they didn’t know that any commission was being charged.”
Interestingly, the ban imposed by the FCA does not in any way prohibit commission. Instead, it affects the way in which all commissions payable must be disclosed clearly to the customer and confirmed upon request.
This will provide the customer with more transparency and a clearer idea of how much they are paying, over and above the actual purchase price of the vehicle.
The move is unlikely to be welcomed by dealers across the country, which in many instances will no longer be able to get away with charging excessive commissions. However, the vast majority of brokers who have so far commented on the new legislation have supported it as a fair and justified victory for the customer.
Crucially, the FCA has reminded motorists that the withdrawal of the discretionary commission model does not necessarily guarantee a fair or competitive deal from every dealership or lender.
Where dealers stand to lose out as a result of the legislation, they may take steps to recoup these losses elsewhere. For example, in the form of elevated interest rates as part of the ‘risk-based pricing’ model that remains the norm across the industry. As a result, the Financial Ombudsman Service has once again stressed the importance of shopping around for a good deal and comparing the market in its entirety. In addition, anyone who believes they are being charged excessively or is in any way unhappy with their car finance deal can contact the Ombudsman directly for advice.