In March 2019, the findings of an investigation by the Financial Conduct Authority (FCA) uncovered concerning evidence of widespread unclear and excessive car finance costs, affecting millions of UK drivers.
Even more shocking is the discovery that the secret commission methods were used on what is commonly represented to be the most cost-effective way of buying a car.
Customers’ finance had been mis-sold when entering into agreements for both new and used cars and commercial vehicles. This applied to all types of vehicle financing options such as personal contract hire and hire purchase. Car buyers were collectively paying £300 million more a year than they should have been.
What Exactly Did The FCA Uncover?
Undisclosed at the time of acquisition, lenders encouraged brokers and car dealers to charge higher interest rates in order to receive higher commissions.
Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, said: “We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission pay-outs for themselves. We estimate this could be costing consumers £300 million annually. This is unacceptable and we will act to address harm caused by this business model.
We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.”
One anonymous finance broker who supports the ban told Autocar: “I’ve been doing this work for 38 years and, frankly, we were getting away with murder. We weren’t treating customers fairly and were, in effect, charging them to earn us money.”
Consumer Complaints About Commission Manipulation
The Financial Ombudsman received consumer complaints regarding the issue. Bea Lovestone, Policy Advisor at the Financial Ombudsman Service said in February 2021: “We have around 200 complaints from consumers unhappy about the levels of commission they’ve paid on their car finance agreements.
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.”
What The Future Holds For Car Finance Customers
The report subsequently led to the FCA changing the way in which commission works in the motor finance sector.
As of January 2021, the practice was banned. The rules were improved to ensure that this wouldn’t be allowed to happen again, potentially saving car buyers £165m per year on finance plans.
Adrian Dally, head of motor finance at the Finance and Leasing Association, called it “another step towards simplicity and transparency that can only benefit consumers as well as dealers, who will find car buyers more willing to take their finance”.
Prior to 2021, it is estimated that hundreds of thousands of drivers have been affected by this immoral practice dating back many years.