The U.K.’s Financial Conduct Authority (FCA) is investigating whether commission payments made by motor finance providers to car dealers and other brokers resulted in U.K. consumers being treated unfairly.

According to a post on the FCA’s website,  “Before January 2021, some lenders allowed brokers (the person that arranges the loan, for example, your car dealer) to adjust the interest rates they offered customers for car finance. Typically, the higher the interest rate, the more commission the broker received. This was known as a discretionary commission arrangement. Discretionary commission arrangements created an incentive for brokers to increase how much people were charged for their car loan.”

“We banned this practice in 2021. But there have since been a high number of complaints from customers about how much they were charged before the ban. Providers (lenders and brokers) are rejecting most of these complaints, because they believe they haven’t acted unfairly and haven’t caused customers to lose out.”

“We’re assessing the extent of the problem to make sure that, if you are owed compensation, you get it in the best way possible.”

As a result of this investigation, motor finance providers could be forced to pay compensation to affected customers. The FCA has paused an eight-week deadline for finance providers to offer a final response to affected customers. The pause will last until September 25, 2024, and covers relevant complaints received by motor finance firms since November 17, 2023.

The FCA is also giving consumers up to 15 months to refer their complaint to the Financial Ombudsman, rather than the usual six months. If the FCA decides further action is required, it could extend the pause.

The probe follows a high number of complaints from car buyers to motor finance companies about how brokers and car dealers were paid commission without their explicit knowledge. If the FCA agrees, it could decide that “widespread misconduct” has occurred.

According to the FCA, brokers and dealers should make customers aware that they earn commission from car finance sales. The ban raised awareness of the model and prompted more complaints, but the FCA noted that car finance providers were rejecting most of these. Two cases — Black Horse Limited and Clydesdale Financial Services Limited (trading as Barclays Partner Finance) — have been upheld in favor of the complainants by the Financial Ombudsman Service and the courts.

“There is significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements. Consequently, we are using our powers … to review historical motor finance commission arrangements and sales across several firms,” the FCA said.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way and, if necessary, resolve any contested legal issues of general importance.”

Sue Robinson, chief executive of the National Franchised Dealers Association (NFDA) commented: “The FCA are engaging with NFDA and have requested a meeting as soon as possible. With these measures coming into force immediately, we strongly encourage our members to read what is required.”



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