On 11 January 2024, the Financial Ombudsman (FOS) published two decisions about discretionary car finance commission – one against Black Horse and one against Barclays Partner Finance.
In these cases, people were charged too high an interest rate to increase the commissions dealers got. And FOS ordered a refund.
This is a scandal that may have affected millions.
These FOS decisions open the way to a large number of claims for refunds from people who took out car finance before 28 January 2021. Martin Lewis says this may be “the new PPI”.
As a result, the Financial Conduct Authority (FCA) which regulates car finance lenders has taken the highly unusual step of pausing complaints about these commissions. It says:
It’s important that any complaints are dealt with by providers in a consistent, efficient and orderly way. Given the high number of possible complaints, there’s a risk this might not happen.
The FCA is now giving car finance companies longer to respond to complaints and allowing you longer to take your complaint to the Ombudsman.
Why refunds are being given
Discretionary commissions were unfair
Before 28 January 2021, it was common for some car finance lenders to allow a car dealer or broker to set the interest rate on a car finance agreement within a range. In this article, I just refer to the car dealer, not a broker, for short.
The dealer would get more commission from the car finance lender the higher the interest rate was. So they had an incentive to set your rate as high as they thought you might accept.
As the dealer chose the rate, this is called “discretionary commission”. This was not explained to the customers, so the commission is also called “undisclosed” or, in layman’s terms, “secret”.
These discretionary commissions were charged on a lot of car finance for both new and used cars. On 28 January 2021, the FCA banned this in car finance. So it isn’t a problem on recent contracts.
If you took out car finance before January 2021, you may have paid a higher interest rate than you should have.
This was unfair as:
- you were not told about it;
- if you had known, you may have negotiated to reduce it or looked to see if you could get finance at a lower rate;
- the dealer didn’t do any extra work to justify paying extra commission.
A typical Ombudsman refund decision
FOS has published two “key decisions”. FOS issues key decisions when it wants them to be seen as typical of decisions the Ombudsman may take in similar cases.
In both cases, FOS took the same sort of decision and ordered the car finance lender to pay a refund that was calculated in the same way.
This is what happened in the Black Horse case:
- the Ombudsman 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 dealer had discretion over what rate to charge. It set the rate for Mrs Y at 5.5% – the highest it could. This got the dealer the most commission;
- the extra discretionary commission accounted for more than half of the interest that Mrs Y would have to pay;
- Mrs Y was not told how large this commission was, nor that the dealer had set the interest rate and the commission;
- the Ombudsman found that this was unfair.
To put this unfairness right, the Ombudsman ordered that:
- Mrs Y should only have been charged the minimum interest rate of 2.49% and the extra commission amount she was charged should be refunded;
- 8% per annum statutory interest should be added to the refund.
In other cases, customers may get more or less, depending on the range of interest rates a dealer was allowed to set and which rate the dealer picked. If a dealer was allowed to set an interest rate between say 3% and 10%, and you win your claim you will get a higher refund if you were charged 8% than if you were charged 5%.
Flat interest
We normally talk about annual interest rates and APRs these days. The Ombudsman has referred to “flat rates” in these refund decisions because that was the way the dealer commissions were set.
Flat rates sound lower than APRs, but this is just a different way of quoting the same interest charge. In Mrs Y’s case, she paid an APR of 10.5% which was equivalent to a flat rate of 5.5% on her car finance.
The important thing is that Mrs Y will have got back over half the interest she paid back as a refund.
Could this apply to your car finance?
Three things matter:
- was your finance taken out before 28 January 2021?
(after that date discretionary commission was banned.) - was your car finance either Hire Purchase (HP) or Conditional Sale (CS) or Personal Contract Purchase (PCP)? You can make a claim about all these types of car finance.
(you can’t make a claim for Personal Contract Hire (PCH), sometimes called car leasing. And you can’t if you arranged the loan with a bank and it was not secured on your car.) - were you charged discretionary commission?
(you have to ask to find this out. This is the key first step in making a claim, and it is easy – see below.)
What doesn’t matter:
- if you are still paying the finance, you finished paying for it or you defaulted;
- if you still have the car, if it has been sold, or repossessed;
- how easy it was to pay the finance. That is irrelevant – this is a complaint that you were charged too much, not that it was unaffordable.
The Ombudsman can look at cases going back six years, or it can go back much further if you have complained within 3 years of finding out that there was a problem. And this is probably the first time you have heard about this! If your car finance is very old, there may be a problem if the lender has not kept any paperwork about it. But many very old PPI claims were won, so don’t let a worry about this stop you from making a claim.
How to make a claim
Starting the claim
These commission arrangements were very common, but you need to know if your car finance included this sort of discretionary/undisclosed commission. So the first step in making a claim is to find this out.
You can simply send an email or a message to the car finance company saying:
“I had car finance from you in [2016] – the reference number was [xxxxxxxxx].
[if you don’t know the reference number, give other details such as an address, date of birth, where you bought the car, car number plate etc to allow the car finance company to identify your agreement.]
After reading the information from the FCA about discretionary commission arrangements on car finance, I am concerned that I may have been charged too much interest.
I would like you to tell me if you used a discretionary commission arrangement on my finance and to give me details of that arrangement.”
There is a list of email addresses for many car finance companies in this other article. If your car finance firm isn’t listed, ask in the comments below and I will try to find one.
Keep a record of what you sent the finance lender. If this is an email, don’t delete it. And if it was a message, take a screenshot of it.
That’s all you have to do at the moment! Don’t make detailed points about why this is unfair or what refund you want – just establish if you may have a valid claim.
There may be a delay before you get a reply
Normally a firm should respond within 8 weeks or you could send it to the Ombudsman.
But the FCA says:
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.
And as part of this, the FCA is allowing firms longer to respond to these complaints. And you are also allowed longer to send your complaint to the Ombudsman. It is still good to start the process now, but it may take a while.
The next step
If the lender says your finance did include discretionary commission, you can then submit a more detailed complaint to the finance company. In some cases, the lender may also reject any complaint about this and you can go straight to the Ombudsman.
I will be able to provide templates to help with this. These may depend on what the FCA decides.
You do NOT need to use a claims company
You don’t need a claims company to do this or a firm of solicitors. It is simple to do yourself and a claims company will take a very large amount of any refund that you get.
It will not be quicker to do with a claims company or solicitors. They don’t have lists of who has valid claims, they will ask the same question that you can. Nor will you get more compensation that way.
IMPORTANT could you also make an affordability complaint?
These undisclosed commission complaints are not the same as affordability complaints.
But if your car finance was very hard to pay from the beginning, it may have been “unaffordable”. You may have had to get behind with other debts or borrowed more in order to be able to pay the car finance.
Here you may be able to win an affordability complaint – see Were you sold a car on unaffordable car finance? for details and how to make an affordability complaint.
If you win an affordability complaint you will get all the interest refunded. In a discretionary commission complaint you only get part of it back.
So I suggest you make the affordability complaint first. Because if you win you will get a larger refund. And affordability complaints are likely to be quicker than discretionary commission complaints. If you lose, you can then revisit the undisclosed commission complaints later.
Any questions?
Ask them in the comments below! These claims are very new, so finding out what other people are doing and the sorts of responses they get can be a great help.
More articles:
Car finance affordability complaints
How to ask for refunds for all types of debt
My energy DD can’t be right!