The commission-based sales model is common in several different industries. However, it’s not without its problems, and this is certainly the case with car finance. In the past, salespersons have been incentivised to push particular finance products, with the promise of earning higher commission as a result.
However, all that’s about to change. As from next year, car finance will no longer be sold on commission, and this is likely to save consumers money.
Here’s everything you need to know about the FCA’s forthcoming car loan commission ban.
Car loan commission – the problem
Car finance mis-selling has become a serious problem in the last few years. Car retailers and finance brokers are effectively able to set the interest rate on their financial products; and they’ve been creating commission rates based on the amount of interest the customer is paying. If the consumer is spending more on their car finance product, that means more cash in the salesperson’s pocket.
This is problematic; not least because it means that car retailers and brokers aren’t acting in the interests of the consumer; but rather with a view to earning higher rates of commission for themselves. This provides the perfect breeding ground for mis-selling, and the FCA has received rising numbers of complaints about the matter.
Car finance mis-selling – proposed action
The FCA launched an investigation to examine the issue in more depth. They found that the practice of creating commission rates to match interest rates was ‘widespread’. This is especially concerning, given that over 90% of car sales were financed using a car loan last year.
As a result, they made the decision to introduce a ban on car finance commission. The ban will come into action on 28th January, 2021. This is to give car dealerships and brokers enough time to implement the new rules in their work practices.
Christopher Woolard, Interim Chief Executive for the FCA, commented: “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.”
Savings for consumers
It’s believed that the proposed changes will result in considerable savings for customers. The FCA anticipates that the average buyer will save £100 to £200 on their loan, which works out as about 6% of the total costs involved.
However, other watchdogs and experts believe the ban will have even greater impact than this. For example, Which? examined various commission models, and found that an average customer with a four-year loan on a £10,000 vehicle would pay, on average about £1,100 more in interest than if the salesperson was paid a fixed fee.
Various organisations have applauded the ban. For example, a spokesperson from Citizens Advice Scotland’s financial health department commented: “As motor finance options are on the up through schemes like contract purchases, this is the time to make sure consumers are adequately protected against these conflicts of interests.”
Another industry expert added: “The interest rate should reflect the risk that the lender is taking, not how much a car salesman thinks you will pay.”
Most agree that the ban offers clarity for those selling car finance deals, and greatly reduces the risk of customers being mis-sold to.
What are the car finance options?
There are two popular types of car finance options. These are:
Hire purchase deals
Sometimes referred to as HP deals, the customer puts down an initial deposit, then repays the remaining cost of the vehicle (plus interest) via monthly payments. Once the contract has ended, the customer pays a small fee to own the car outright.
Personal Contract Purchases
These are often called PCPs. In this instance, the car dealership estimates what the car will be worth by the end of the term of the contract, which is usually three or four years. This estimate is effectively set in stone, and is called the Minimum Guaranteed Future Value (MGFV).
As with a HP, the consumer pays a deposit, followed by monthly instalments, until the contract is over. At the end, they’ve got the choice to buy the car outright by paying a final ‘balloon payment’, return the car, or part-exchange it for a newer model.
Risks associated with HPs and PCPs
Unfortunately, there are risks associated with both of these car finance deals. Sometimes, salespeople fail to explain what these risks are – which again, is regarded as mis-selling. For example, customers often aren’t aware of the following:
- If you miss a payment, your car may be repossessed.
- With a PCP, the car isn’t automatically yours at the end of the contract; you’ll need to make a balloon payment.
- The car’s balloon payment can be a sizeable amount; sometimes more than customers can afford.
For more facts and figures on PCP mis-selling, take a look at our recent infographic.
Have you been mis-sold your car finance deal?
Obviously, it’s welcome news that the FCA is banning commission on car finance deals. This will hopefully reduce the risk of mis-selling in the future.
It doesn’t help those that have already experienced mis-selling; but the good news is, there are steps you can take to seek compensation.
Have you been mis-sold to?
- Did the salesperson outline all the costs involved?
- Did they explain what would happen if you don’t meet the monthly repayments?
- Did they explain that (with a PCP) you don’t own the car until you make a balloon payment?
If you answered ‘no’ to any of the above, that’s a potential case of car finance mis-selling. Also, if they tried to sell you additional products that you didn’t need (e.g. insurance), that may count too.
What to do?
If you think you’re eligible to receive compensation for a mis-sold car finance deal, get in touch with Goodwin Barrett today. To find out more about how we can assist you, call us on 0808 163 1659 today or email firstname.lastname@example.org.