The industry body, the Finance and Leasing Association, said: “The consumer car finance market is on track to report annual new business by value and volume of £39 billion and 2.1 million cars in 2023.”
Traditionally, many people would buy a car using a hire purchase (HP) or conditional sale agreement – both types of consumer credit where you own the car at the end of the finance agreement.
But from the financial crisis of 2008, personal contract purchase (PCP) grew to become the most popular form of credit to buy new and used cars in the UK.
After an initial deposit, the monthly payments are lower than HP and after a few years you can either make a “balloon payment” to own the car outright or swap the car for a new model. It became an attractive way to afford a new car.
Car dealers often act as brokers for separate lending companies. Until January 28, 2021, car dealers were able to set the interest rate on loans within a low to high range.
What you as a customer didn’t know was the car dealer would get a higher “discretionary commission” if they persuaded you to accept a higher interest rate.
In a nutshell, there was an unethical incentive and conflict of interest on car dealers to hike up your interest rate to make more secret commission for themselves.
The Financial Conduct Authority (FCA) banned this practice in January 2021.
This month the Financial Ombudsman Service (FOS) upheld a complaint for a woman, Ms Y, who took out a car finance agreement with Black Horse Limited that had a discretionary commission.
The car dealer was empowered by Black Horse to set an interest rate between 2.49% and 5.5% and it opted for the highest rate. The FOS required the lender to repay Ms Y interest at the lower 2.49% rate and found her entitled to add 8% interest per annum on that sum.
It’s understood Ms Y had made 14 months of payments until her agreement was terminated and is due to receive an award of around £600 in compensation.
Around two weeks ago, the FCA announced its review into the commission arrangements in this sector and 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.”
Meantime the FCA extended the usual eight-week time period for lenders to respond to customer complaints to 37 weeks. Have you been affected?
Generally, you have six years to complain from your finance agreement or three years of becoming aware of a right to claim.
You can contact your lender (email the customer services department, for example), quoting your finance agreement number and request that they disclose whether there was a discretionary commission in your case.
FCA rules and data protection law require creditors to disclose this information to you. If you’ve been affected then put in a complaint for a refund based upon the lower rate of applicable interest. You can get free guidance on how to do this from MoneySavingExpert and other trusted consumer guides.