Buyers who took out car finance deals that included non-discretionary dealer commission are set to have longer to complain after a court ruling deemed the practice unlawful.
In what is being called the biggest finance scandal since PPI in the middle of the last decade, the Financial Conduct Authority said it will make its decision on extending the complaints timeframe by mid-December.
The move comes after some car makers paused sales in the wake of the Court of Appeal judgement, which also threw banks and dealers into a state of disarray, given that it effectively bans dealers from profiting on finance deals unless the buyer gives their consent.
The ruling by the Court of Appeal – one of the highest courts in the country – was announced as part of a case brought against Close Brothers and Firstrand Bank by three customers who claimed they were mis-sold finance deals. The trio had previously had their cases thrown out by lower courts.
Judges unanimously ruled to uphold their appeals, stating that “a broker could not lawfully receive a commission from a lender without obtaining the customer’s fully informed consent to the payment”.
The lenders are expected to appeal the decision.
Moreover, the ruling effectively threatens the long-established agreement that dealers receive commissions from banks or lenders for acting as a middle man in selling finance agreements on vehicles.
Since the ruling, many car makers have already begun to disclose commission rates to customers in order to continue business as normal.
The ruling has sent shockwaves through the industry as it braces for a barrage of incoming lawsuits, likened to how the payment protection insurance (PPI) scandal exploded at the turn of the 2010s.
Among those gearing up for the worst is Lloyds Bank, as the owner of Black Horse, a leading lender of car finance. In February, it revealed it had set aside £450 million to cover legal expenses and compensation payouts.
It follows an investigation earlier this year by the Financial Conduct Authority (FCA) concerning discretionary commission arrangements (DCAs) sold between 2007 and 2020, after more than 10,000 complaints were made.
DCAs allowed dealers and brokers to adjust lenders’ interest rates to reward themselves with commission payments on hire purchase (HP) and personal contract purchase (PCP) deals.
In one complaint, the FCA stated, Black Horse was found to have allowed a dealer to set an interest rate between 2.49% and 5.5%, with anything over 2.49% being paid to the dealer as commission. The dealer charged the highest rate of 5.5%, amounting to half of the customer’s total interest bill on the loan. In addition, the dealer didn't tell the customer it had set the interest rate or how much commission it had earned.
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I just don't understand any of this, unless of course you're a lawyer or ambulance chaser, both who'll do very well out of these claims.
1. You go to a dealership to buy a car on finance, they say it'll cost you £400 a month and you agree. What does it matter where the money goes to if you're happy to pay £400 a month?
2. Competition. I was under the impression competition was supposed to lower prices? So if one dealer wishes to take less of a commission then shop around and you'll find the same car for £390 a month. Is that not how it's supposed to work?
3. If a dealer needs to make £1000, and they do so at present via cashback from a finance company, if you don't agree to their cut under the new rules, isn;t the dealer just going to put £1000 on to the price of the car?
As I say, unless you're in the legal business or the 'no win no fee' game, who else stands to benefit from this? It's certainly not the buyer.
It's no different from the stupid ruling on insurance companies no longer able to offer incentives for new customers. Who benefits from that, because to maintain their profits, it just means new customers now have to pay more, it doesn't mean existing customers will see their policies reduced in price.
Sometimes I think there is too much consumer protection in this country. So when someone buys a car on finance, it should be up to them to either agree to the terms or not. If the dealer is getting a back-hander from the loan company, or adjusting the terms of the loan in its favour, then the customer has a right to reject the terms and go elsewhere.
As someone with an elderly relative who was pressurised into a very expensive finance agreement that was significantly above market rate, I hope a day of reckoning is coming for the companies involved.
Crocodile tears are flowing at the thought of car salesmen struggling to meet their monthly targets now. Boo hoo.
And how will this ruling benefit that elderly relative next time they go to buy a car? Dealership just increases the price of the car to compensate for their loss in commission. It's not rocket science.
Define market rate exactly? Not everyone gets the same rate from a bank.
The system is so flexible its laughable. The banks (lenders) will just amend the criteria in the background to increase the rate for everyone concerned.
The retail business is starting to get very American in the way it operates. Next dealers will have to declare the profit they make on the product like US dealers do.
If you can't afford a new 30k car keep your existing 10k one or buy a 20k one. Yes I know it's not possible or relevant in all cases but to many people are over stretching themselves and the manufacturers and dealers are all to happy to keep pumping up prices and finance.