A shocking investigation by a British watchdog has discovered that car dealers are manipulating customers’ interest payments to earn larger commission totalling an ‘unacceptable’ £300 million each year.

The report comes almost two years after the Financial Conduct Authority (FCA) declared they would carry out mystery shopping trials of the industry and analyse millions of credit files.

On a mission for commission

In 2018, UK motorists borrowed a staggering £37billion on car finance to buy new and used vehicles. The popularity of loans such as Hire Purchase (HP) and Personal Contract Purchase (PCP) enable motorists to buy their car by paying instalments and mean big business for both car dealerships and lenders. In fact, Brits buy about nine out of ten new cars this way.

Yet, a recent investigation by the FCA found that lenders aren’t satisfactorily controlling the ‘conflicts of interest’ that are occurring from the extensive use of commission models that enable car dealers to make more in commission by deciding the interest rate.

Under certain commission models, the regulator estimates motorists can pay around £1,100 extra in interest charges over a four-year period for a typical car finance agreement on a £10,000 vehicle.

About 560,000 drivers have signed contracts where the loan price has a link to the level of commission received by the dealer, yet the watchdog discovered the bulk of dealers neglected to tell their customers they would receive a commission for setting up the loan.

How many car dealerships disclosed they would receive a commission on the sale?

Franchised car dealers: One in 37
Independent car dealers: Four in 60
Car supermarkets: Two in 14
Online brokers: Four in 11

‘Not good enough’

After uncovering serious concerns about car finance agreements from 20 lenders, making up about 60% of the market, the FCA has contacted car finance companies and says it’ll get tougher on the rules of car finance commission deals.

FCA Executive Director of Supervision – Retail and Authorisations, Jonathan Davidson, said:

“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.”

The FCA found a few dealers were only concerned whether their customer was a credit risk.

“This is simply not good enough and we expect firms to review their operations to address our concerns,” added Mr Davidson.

The watchdog is considering strengthening existing FCA rules, limiting the discretion that brokers have to set interest rates, and banning certain commission models.

For those firms identified as failing customers, the FCA will pursue them and take any necessary action.

Although this sounds like earlier mis-selling scandals such as Payment Protection Insurance (PPI), the FCA isn’t intending to make finance companies pay compensation to those customers who paid more than they should have, nor does it plan to do anything about any existing loans.

The motor finance trade body, the Financial Leasing Association (FLA), criticised the FCA’s report.

Adrian Dally, Head of Motor Finance for the FLA, said:

“Regarding the FCA’s concerns about commission structures, their survey work is based largely on out-of-date information and therefore does not reflect the very considerable progress the market has already made in moving away from such structures.

“We look forward to working with the FCA as it modernises its regulations in line with market best practice.”

Navigating the options

If you’re planning on getting a new car, shop around using reputable retailers, compare finance deals, check the total amount you’ll need to pay back, and ask how much the broker or dealer will receive in commission.

If you can’t afford to pay for your next vehicle outright, the next cheapest option is to make a one-off payment using an unsecured personal loan but, unless you’ve got a great credit score, it’s doubtful that you’ll get approved and, by purchasing a vehicle this way instead of taking the finance offered by the finance arm of the manufacturer, you won’t get any money towards the car.

Personal car loans are both easy to understand and set up and you might also get the dealer to reduce the price due to being a cash buyer. Once you’ve paid the dealer, you own the car outright, although that also means you’re responsible for all the repairs!

HP and PCP deals work out more expensive and you don’t own the vehicle until you make the last— often large —payment.

If you buy a car using HP or PCP, try to pay off at least part of the balance with a credit card so you have the extra protection offered under Section 75 of the Consumer Credit Act, which states that the credit card company has joint responsibility with the retailer—useful if you make a future complaint.

What do you think of the FCA’s findings? Are drivers being ripped-off or pressured into finance they don’t understand and can’t afford? Tell us your views in the comments.

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