The UK’s financial regulatory body has banned the ‘discretionary commission car finance’ model in a move it claims will save car-buyers £165 million a year.
The FCA (Financial Conduct Authority) has banned the method used by car dealers and brokers that sees them receive a commission linked to the interest rate the customer pays. The FCA says that ‘this creates an incentive for brokers to act against customers’ best interests’.
Initially announced in July 2020, the changes have now come into effect.
Preventing this type of commission will ultimately remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance.
The FCA’s Interim Chief Executive, Christopher Woolard, said: ‘By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers. We estimate that consumers could save £165 million because of today’s action.’
Adrian Dally, Head of Motor Finance at the Finance and Leasing Association, added: ‘This is a welcome announcement from the FCA as it provides clarity for the industry. We are also pleased that the regulator accepted our point about the need to monitor the consumer hire market as the ban on discretionary commissions does not extend to personal contract hire agreements.’
Crucially, salespeople can still receive a commision for signing customers up to a finance agreement. However, the customer must be told that the salesperson is earning a commision and how much it is.
How does the discretionary commission model work?
Previously, some retailers and brokers allowed salespeople to make a commission based on the interest rate they charge the customer. The higher the interest rate, the higher the commission.
Interest rates are generally tied to ratings such as your credit score. Theoretically, people with better credit scores get lower interest rates. If salespeople’s commissions are tied to charging higher interest rates, higher interest rates will obviously be charged.
An example: A used £11,000 Ford Fiesta on a typical PCP deal with different interest rates. (These vary on depending on dealers)
Interest rate: 3.4%
Agreement length: 48 months
Deposit: £1123
Monthly payments: £190
Optional final payment to buy the car: £3,099
Interest rate: 4.8%
Agreement length: 48 months
Deposit: £1123
Monthly payments: £201
Optional final payment to buy the car: £3,099
Using the same parameters, but with the interest rate increased from 3.4% to 4.8%, your monthly payments would rise to £201 per month.
That’s an increase of £11 per month, or an additional £528 over the period of the 48-month agreement.
What this means for you
Ultimately car salespeople can no longer make money off signing you up for a higher percentage APR rate. This theoretically means the next time you’re shopping for a car, the salesperson should offer you the lowest APR they can, saving you money.
But remember, even with this discretionary car finance model kicked into touch, it pays to shop around. Different car dealers offer different APR rates for different people depending on their circumstances. While some manufacturer-backed deals even see 0% APR attached – assuming you have a good enough credit score.
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