After decades of widespread use, the car finance industry’s ‘discretionary commission’ finance model is no more.
New legislation introduced by the Financial Conduct Authority (FCA) banned the controversial practice, which saw car buyers pay more than £300 million in excess charges each year.
Dealers have previously been allowed to impose their own rates of interest and earn discretionary commission, acting against the best interests of their customers.
But, under the new legislation, they are prohibited from overcharging car buyers with inflated rates of interest – a practice that has meant most customers have been completely unaware they were paying over the odds for years.
Discretionary commission was based on the interest rate they charged the customer and the system encouraged dealers to sell finance packages at the highest possible interest rates. Banning discretionary commission means that is at an end.
The FCA’s ban should put paid to the practice of selling car buyers finance packages at inflated interest rates. While earning commission itself is not banned, all payable commissions must be disclosed clearly to the customer and confirmed upon request.
This offers a great deal more transparency to the customer who must be furnished with a clearer idea of how much they are paying, over and above the purchase price of the vehicle. Dealers and brokers are now required to give vehicle buyers more relevant information.
So, does the new discretionary commission ban mean every dealership or lender will be offering fair and competitive deals? Not necessarily. The FCA has issued a reminder that the withdrawal of the discretionary commission model does not guarantee that.
Dealers stand to lose out as a result of the legislation and, somewhat unsurprisingly, they may take steps to recoup their losses elsewhere. The Financial Ombudsman Service has also reiterated the importance of shopping around for the best available deal.
Anyone who believes they are being charged excessively or are in any way unhappy with their car finance deal can contact the Financial Ombudsman Service directly for advice.
The Ombudsman had received countless complaints about excessive commissions and elevated interest rates. What became clear was that credit providers had set the range of interest and then pitched their buyers’ rates within that band.
Many also revealed that they didn’t know that commission was being charged at all.
So what does the ban mean for car buyers?
The new rules are good news for buyers looking to take out car finance. The FCA estimates that the ban on discretionary commission could save UK customers a total of £165 million in interest payments each year.
A finance company might have been able to give the dealer the discretion to set their customer’s interest rate and pocket extra commission while the buyer’s monthly payments were hiked up.
Dealers can no longer earn money by pushing up interest rates. They should, in theory, default to the lowest rate available in order to help them secure their customers’ business.
They will still be able to earn commission for selling a finance agreement, and commissions will still be linked to the amount borrowed, but they will no longer profit by making their customers pay more interest.
The new rules are likely to provide the biggest benefit to used car buyers, as interest rates tend to be significantly higher than those available on new cars. Another important point to bear in mind is that the new rules do not apply to leasing, which doesn’t involve the buyer borrowing money.
Most car finance customers tend to look at their overall monthly budget and decide if they can afford the car they want within that figure. If the dealer is unable to get extra profit from charging more interest, they are likely to try to find other ways to earn extra money, such as breakdown packages, Gap insurance policies and extended warranties.
It could be that dealers and brokers simply try to encourage customers away from PCP car finance and towards personal contract hire (PCH) leasing if it is a more profitable arrangement for them. The FCA has indicated it will monitor this to ensure customers are not being misled or switched to a different type of funding agreement.
While the FCA’s new legislation puts an end to hidden commission charges for car buyers, many have already paid over the odds in dealer’s commission via a PCP agreement.
Barings Law can help.
If you feel you have paid more money than was necessary, or you weren’t given all the information when taking out a PCP agreement, you may be entitled to make a claim.
Speak to our team of experts by visiting baringslaw.com to see if you are eligible to make a claim for compensation. We have our webchat team on standby to answer all your questions.