Dealers need to “very urgently assess” the implications of recent moves from the Financial Conduct Authority on historical motor finance commissions, says the Vehicle Remarketing Association.
While the subject has been gathering prominence in recent weeks following two recent rulings by the Financial Ombudsman, a new programme hosted by personal finances guru Martin Lewis has substantially raised its profile.
Jonathan Butler of Geldards, the VRA’s legal counsel, said that dealers should try to establish how many relevant sales between 2007 and 2021 are affected, seek out specialist legal advice, and ideally, challenge the claims they are facing.
He said, “In 2021, the FCA banned discretionary commission arrangements (DCAs), which saw commission payments tied to the interest rate on hire-purchase agreements and under which the broker had the discretion to select from a pre-determined range set by the finance house, with a selection of a higher interest rates paying more commission.
“If you were sold a car finance deal in the run up to the FCA ban, you can therefore potentially make a complaint and be compensated. Many thousands have tried and following Martin Lewis speaking on Money Saving Expert, ITV on 6 February 2024, many more are doing so.
“The usual argument runs that dealerships and lenders typically act as fiduciaries with customers when brokering finance and therefore owe them a special duty of care. Part of that duty, they claim, is not only to disclose that a commission might have been paid, but what that commission is. In the event of non-disclosure, the complainants argue that any breach of an FCA rule is actionable by anyone who suffers a loss.
Jonathan said that robust and legitimate defences are available against these claims but are being ignored.
“In two recent decisions, Mrs Y and Barclays (2016) and Mrs L and Clydesdale (2018), the Financial Ombudsman found in favour of the complainants, effectively finding that it was a breach of the rules for brokers in those cases, two finance houses, not to disclose the very structure of the discretionary commission arrangement.
“In both these cases, the Ombudsman ordered the customer to be repaid the difference between firstly, the payments made under the finance agreement at a flat interest rate of 5.5% and secondly, the payments the customer would have made including when the loan was settled early, had the finance agreement been set up at the lowest zero discretionary commission paying flat interest rate permitted of 2.49%, as well as interest on each overpayment at the rate of 8% simple per year calculated from the date of the payment to the date of settlement.
“These decisions ignore sound interpretation of the FCA’s own rules. They also traverse the traditional role of the courts and well-established case law written by judges having heard oral argument and evidence at trial. The FCA’s approach now affects potentially millions of transactions in respect of new and used cars over a 15-year period between 2007 and 2021.
“The reality is therefore that lenders and dealers will now need to very urgently assess what the financial implications for them might be.”
Jonathan said it was difficult to understand the FCA’s motivations.
“If this is part of an ideology to de-clog the courts and paralyse claims management companies, such an approach is cynical and should be robustly opposed. If on the other hand, it’s prompted by a commercial imperative to stimulate the automotive sector by putting money back into the hands of consumers to spend money on new car finance – something which the FCA actively wants to encourage – then ironically, the sector might come to thank the FCA for its recent decisions.”
But he added that for some, these claims pose an existential threat in circumstances where perceived unfairness is not the same as actual unlawfulness, and there are strong arguments that customers were generally better off under the old arrangements than now.
“It could be said that DCAs pre-2021 promoted competition within the marketplace, and therefore better deals. What we see now are fixed interest rates that cannot be negotiated, typically at 9.9% APR or above. With DCAs, the majority of customers were receiving much lower rates. Arguably then, before DCAs were banned, if you had a decent credit history, income, etc, you were rewarded by being able to borrow more and receive a lower rate of interest.
“Now everyone is the same boat, car prices are now generally higher and discretion has gone. The FCA does not seem to be looking at the overall position but rather taking the perceived bad bits out of context. Of course, if you only say that dealers got more commission the higher the interest rate, it sounds a bad thing and that consumers have been harmed, but this rarely happened with reputable dealers.
“If consumers are paying a greater price now than they did before, what good is the FCA promoting and what harm is it actually preventing?” he asked.