FCA set to complete a review of car finance market

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The Financial Ombudsman have issued decisions against Black Horse and Barclays Partner Finance about discretionary car finance commission which may have affected millions of customers

On January 11th 2024 the financial services regulator, the Financial Conduct Authority (FCA), announced it would be completing a review of the car finance market.

This comes after the Financial Ombudsman Service (FOS) upheld several decisions against car finance lenders regarding discretionary car finance commission.

The FOS upheld these decisions after finding that customers were charged too high an interest rate to increase the commissions dealers received; and the FOS ordered a refund.

Review of car finance

This scandal has been described as ‘the new PPI’ by the founder of MoneySavingExpert, Martin Lewis.

ITV news says ‘millions could be due a huge payout after a major investigation was launched into the mis-selling of cars and vans on finance’.

What is Discretionary Commission?

Before January 28th 2021, it was common for some car finance lenders to allow a broker to set the interest rate on a car finance agreement, for both new and used cars, within a certain range. The higher the interest rate meant that the broker would then receive more commission.

This is called ‘discretionary commission’. It is likely that this was not explained to customers meaning that the commission is undisclosed or secret.

The FCA banned this in car finance on the 28th January 2021, so isn’t a concern on contracts after this date.

Why was this unfair?

For a lot of customers that took out car finance before this method was banned, they may have paid a higher interest rate than they should have.

This is unfair as it’s likely that customers were not told about the commission method. If customers had known, they may have negotiated to reduce this rate or sought alternative finance arrangements at a lower rate. It is also unlikely that the broker did any extra work to justify the extra commission.

What do the Financial Ombudsman decisions say?

Black Horse (a subsidiary of Lloyds Banking Group) complaint

The FOS found that Black Horse was prepared to lend to Mrs. Y at any flat interest rate between 2.49% and 5.5%, with any amount over 2.49% going to the dealer as commission
The broker had discretion over what rate to charge. The broker set the charge at 5.5% for Mrs. Y, being the highest it could. Resulting in the broker the most commission
The extra discretionary commission accounted for more than half of the interest that Mrs. Y would have to pay
It was not explained to Mrs. Y how large the commission was or that the broker has set the interest rate; and the commission
The FOS found that this was unfair

To put this right, the FOS ordered that Mrs. Y should only have been charged the minimum interest rate. The extra commission amount she was charged should be refunded with 8% per annum statutory interest should be added to the refund.

Barclays Partner Finance complaint

Similar to the above, the broker had discretion over the interest rate that could be charged to the customer and the higher the rate, the higher the commission.

The FOS made the same decision to uphold the complaint and ordered the lender to pay a refund using the same calculation method as above.

Did all lenders use Discretionary Commission?

Whilst this was very common pre January 2021, not all lenders operated this way.

In a case against BMW Financial Services the FOS found that the broker was paid fixed commission by the lender. The customer that purchased the vehicle was not told how large the commission was but the paperwork did state that the broker would receive a fee.

The FOS decided that the commission was not unfair because it could not be increased by the broker and this case was not upheld.

I think I have overpaid, should I make a complaint?

The FCA have paused the complaints process whilst they examine the issue to ensure that if customers are owed compensation, that this is done in the best way possible. The FCA have paused the 8 week deadline for providers to respond to complaints about car finance involving this type of commission.

The FCA have said that providers do not have to respond to complaints until after the 25th September 2024, at the earliest.

The FCA say that managing the complaints in a consistent, efficient and orderly way is important as this type of borrowing isn’t covered by the Financial Services Compensation Scheme. This means that if the provider is to go out of business, customers may not get the money they are owed.

The FCA are looking into whether compensation might need to be given and it could mean that payouts are made to the customers who’ve complained; or a bigger outcome would see full payouts for to all effected.