In March of 2019, an investigation carried out by the Financial Conduct Authority (FCA) brought to light concerning evidence of extensive instances of unclear and disproportionately high car finance costs, impacting a significant number of UK drivers.
Even more alarming was the revelation that covert commission methods were employed within what is typically presented as the most economically viable route to purchasing a car. Customers who sought car finance found themselves ensnared in agreements for both new and used vehicles, including commercial ones. This encompassed various types of vehicle financing alternatives like personal contract hire and hire purchase. Collectively, car buyers were collectively overpaying by a staggering £300 million annually.
What were the exact findings of the FCA?
Hidden from view during the time of acquisition, lenders were encouraging brokers and car dealers to impose elevated interest rates, enabling them to earn inflated commissions.
Jonathan Davidson, the Executive Director of Supervision – Retail and Authorisations at the FCA, emphasized, “We have identified instances where certain motor dealers are subjecting unsuspecting customers to excessive interest charges, amounting to over a thousand pounds, with the aim of securing larger commission payments for themselves. Our estimate indicates that consumers are shouldering an excessive £300 million each year due to this practice. This is unacceptable, and we are committed to rectifying the harm inflicted by this business model. Additionally, we have concerns that firms may be falling short in meeting their existing obligations regarding pre-contract disclosure, explanations, and affordability assessments. This is unacceptable, and we expect these firms to comprehensively review their operations in order to address our concerns.”
An anonymous finance broker who supports the ban conveyed, “In my 38 years in this line of work, I must admit that we were getting away with unjust practices. We were not providing equitable treatment to customers and were essentially charging them in order to bolster our own profits.”
Consumer complaints surrounding commission manipulation
The Financial Ombudsman received numerous complaints from consumers pertaining to this issue. Bea Lovestone, Policy Advisor at the Financial Ombudsman Service, stated in February 2021, “We have been approached by approximately 200 consumers who express discontent with the commission levels they have incurred within their car finance agreements. They refer to ‘commission manipulation,’ where the credit provider establishes a range of interest rates, and subsequently, the dealer or broker sets the consumer’s rate within this predetermined range. Others contend that they were entirely unaware that any form of commission was being applied.”
Prospects for car finance customers going forward
Subsequent to the report, the FCA instituted changes to the way commission operates within the motor finance sector. As of January 2021, this practice has been prohibited. The regulations have been enhanced to prevent a recurrence of such practices, potentially saving car buyers a substantial £165 million annually on their finance arrangements.
Adrian Dally, the head of motor finance at the Finance and Leasing Association, labelled this development “yet another stride toward clarity and transparency that will undeniably benefit consumers, as well as dealers who will likely witness increased receptivity from car buyers towards availing finance options.”
It’s worth noting that prior to 2021, it is believed that a considerable number of drivers, numbering in the hundreds of thousands, were affected by this unethical practice that spanned several years. Source ( Bott & Co )
For those concerned, it’s advisable to evaluate whether you might have been a victim of mis-sold car finance.