Discretionary Commission Arrangements - Compaints and refunds
The Financial Conduct Authority (FCA) has taken significant actions against companies that used Discretionary Commission models in the motor finance sector in the UK. Recognizing that these models created conflicts of interest and often led to consumers paying higher finance costs, the FCA decided to implement a ban on these commission models. This decision was made following extensive research and consultation, leading to the conclusion that such models incentivized motor finance brokers and dealers to raise customers' finance costs to earn higher commissions.
The FCA officially announced the ban on Discretionary Commission models in July 2020, with the rules coming into effect on 28 January 2021. This move was aimed at increasing competition and protecting consumers, with an estimated saving of £165 million a year for consumers due to the ban. The FCA found that the widespread use of Discretionary Commission models led to higher finance costs for consumers and that moving away from these models would likely result in reduced financing costs.
In addition to the ban, the FCA introduced new rules to ensure that consumers are given more relevant information about the commission they are paying. These disclosure changes apply to many types of credit brokers, not just those selling motor finance, and also came into force on 28 January 2021.
Further actions by the FCA included pausing the requirement for firms to provide a final response to complaints about motor finance agreements with Discretionary Commission arrangements within 8 weeks of receiving the complaint. This pause, lasting for 37 weeks, was part of the FCA's effort to review sales of historical motor finance commission arrangements and to ensure any potential redress leads to the right outcomes for consumers. During this pause, the FCA extended the time consumers have to refer Discretionary Commission Arrangement complaints to the Financial Ombudsman Service from 6 to 15 months if the firm sent its final response within the period specified in the rules.
These actions reflect the FCA's commitment to protecting consumers and ensuring fair practices in the motor finance industry. The ban on Discretionary Commission models and the subsequent rules and reviews are designed to address and mitigate the issues identified, ensuring that consumers are not unfairly charged higher finance costs due to conflicts of interest inherent in the previously used commission models.
Lenders allowed car dealers to use discretionary commission models primarily due to the flexibility it provided in setting interest rates for car finance loans. This model enabled brokers, such as car dealerships, to adjust interest rates charged to customers, which directly influenced the commission earned by these brokers. The higher the interest rate set by the broker, the higher the commission they received. This practice created an incentive for brokers to potentially overcharge customers by setting higher interest rates to maximize their commissions.
The Financial Conduct Authority (FCA) identified that discretionary commission arrangements incentivized brokers to increase how much people were charged for their car loans. This led to a high number of customer complaints about the charges they faced before the ban was implemented in 2021. Two notable cases that influenced the FCA's decision to probe deeper into the issue involved decisions by the Financial Ombudsman Service against Black Horse Motor Finance and Barclays Partner Finance, where customers were deemed not to have been treated fairly due to the discretionary commission agreements in place.
This model was deemed unfair as it likely resulted in customers paying a higher interest rate than necessary, without being fully informed about the commission method. Customers, had they been aware, might have negotiated a lower rate or sought alternative finance arrangements. The lack of transparency and the potential for significant additional costs without corresponding extra work from the broker led to the FCA's decision to ban this practice in car finance agreements from January 28, 2021.
In summary, the use of discretionary commission was driven by the potential for higher profits through increased commissions, at the expense of consumer transparency and potentially leading to higher finance costs for consumers. The FCA's subsequent ban of this model reflects a move towards ensuring fairer treatment for consumers and more transparent finance agreement practices.
The lenders most affected by the discretionary commission issue in the UK car finance market include several well-known firms. Martin Lewis, on his ITV Money Show, highlighted five finance firms that could owe customers money due to hidden discretionary commission arrangements. These firms are Barclays, Black Horse, Santander Consumer Finance, BMW Group Financial Services, and Mercedes-Benz Financial Services. These companies were named as part of an investigation into mis-sold car finance, which could lead to a significant number of claims from customers who bought a car on finance before January 28, 2021.
Furthermore, three Lloyds businesses, specifically Black Horse, Santander, and MotoNovo Finance, have been implicated in allegations of overcharging on car finance loans between 2015 and 2021. These lenders are accused of applying excessive interest on customers' car finance loans, totaling almost £1 billion. It's claimed that Black Horse added £624 million, MotoNovo Finance £209 million, and Santander £166 million in excessive interest, affecting many customers across the UK.
These findings have prompted a significant investigation by the Financial Conduct Authority (FCA), leading to a major review of the car finance market. The review aims to address and rectify the issues surrounding hidden discretionary commissions, which were allowed by lenders and led to customers potentially overpaying without their knowledge.