Car finance - hidden commission payments

[phpe]

Interesting segment on Martin Lewis Money Show tonight about car finance arrangements between April 2007 and Jan 2021

https://www.moneysavingexpert.com/reclaim/reclaim-...

Background - in 2021, the Financial Conduct Authority banned the common practice of "Discretionary Commission Arrangements" where the credit broker(typically the selling garage) manipulated the interest rates offered to car buyers in return for hidden commission payments paid by the finance providers to the credit broker

In early 2024, the FCA announced further investigations which may lead to potentially big implications for the affected lenders.

https://www.fca.org.uk/news/press-releases/fca-ban...

https://www.fca.org.uk/news/statements/fca-underta...

Martin, in his inimitable style, has put together an easy to use tool in the link above to help people find out if the agreement(s) they have had with various finance companies/lenders are of the type that may have contained hidden commission payments, and to help people log claims ahead of any potential FCA deadlines in the future.

Clearly, all PH'ers are company directors of the powerfully built variety and would never have sullied themselves with something as tawdry as a finance agreement, but on the off chance you did have an unusually expensive agreement....perhaps worth investigating.

[phpe]

My gut feel is that this will mainly affect used car finance agreements, which are typically higher rates than new car rates

New car deals tend to be standardised deals/discounts/finance contributions offered to all eligible applicants if they met underwriting criteria

Used car rates were often at the discretion/influence of the credit broker/selling garage to set themselves in return for extra commission levels/tiers, which is where the conflict of interest arose.

[phpe]

sugerbear said:

Thanks. Two more claims going in then :-) Trying to find details of when I purchased them is going to be fun as it was back in 2010!

Do a subject access request to the finance companies for historical records about you.

https://ico.org.uk/for-the-public/your-right-to-ge...

[phpe]

It's an incestuous industry - in a main dealer world, the car manufacturers typically have their own finance companies and have tightly run franchise agreements with independent retailers/dealer groups.

To the ordinary man in the street, they would perhaps associate that for example, BMW AG (the manufacturer) is the same as BMW UK (the importer), is the same as BMW Financial Services and is the same as their shiny glass palace BMW local dealer when from a legal standpoint, they are all completely separate entities, further confused by the fact that BMW AG wholly owns BMW UK & BMWFS, as well as some BMW dealerships.

The situation where the franchisee/independent retailer can artificially bump up the rate of interest charged to the buyer to earn much higher hidden commission than if BMW Financial Services made their own decision about what rate to offer the buyer is what has gained the attention of the FCA in recent years.

I don't think any buyer is overly concerned about the fact that commission changes hands between the finance company and the dealer...more that that the amount of commission paid isn't disclosed on any of the finance agreement paperwork and the dealer has been less than transparent about how it works.

Car sales tends to be a fairly rapid, high pressure sales environment where people are making impulse decisions about what is typically one of their biggest monthly expenses outside of mortgages and childcare.

It's not the same situation, but would people accept a situation where mortgage brokers artificially jack up the rates offered to customers compared to what a mortgage lender would offer and not disclose this increase & not disclosing the amount of commission being paid by the lender to the broker?

[phpe]

pork911 said:

sugerbear said:

Fixed rate commission is fair enough (based on the size of the loan).

But the seller being able to set their own commission based on the % they can hawk to? That is outrageous.

Should prices be fixed by the state?

No - they should be determined independently (as is now the case from 2021 onwards) by the finance company itself, and not by the hidden influence of the car dealer.

[phpe]

fourstardan said:

Would you know by any wording on the finance agreement if they've added this hidden commission?

Highly unlikely

Quote from the Martin Lewis website link: https://www.moneysavingexpert.com/reclaim/reclaim-...

The FCA estimates 95% of car finance deals had a commission model, and 40% the crucial ‘discretionary commission arrangements’. If yours did, and it wasn’t made clear – which it almost never was – we reckon you're likely to be entitled to money back when the FCA finishes its investigation and un-pauses complaints (scheduled for 25 September 2024, but may be extended). Check if it likely applies to you...

[phpe]

fourstardan said:

Thanks, I thought so as I couldn't see anything in the small print.

I should raise a case about a TT I bought in 2007 but it was so long ago I expect time has lapsed.

The time period from April 2007 to January 2021 seems to be the crucial period for the finance agreement to have been set up in for any possible complaint to be eligible

Edited by phpe on Thursday 8th February 19:52

[phpe]

The only view that matters is that of the regulator, the FCA.

It has already looked at the practice in detail, decided it caused consumers harm and banned it in 2021.

What is happening now, until September 2024, is that it has allowed the finance companies a temporary pause in responding to complaints whilst it reviews what, if any, standard method of assessing the value of potential harm should be

[phpe]

Sadly, the motor trade is not covering itself in glory when it comes to abiding with the spirit and rules of FCA regulations. You'd think they'd learn.

Even today, more news about GAP insurance sales halted by insurers and dealers, due to significant concerns about how it is sold

https://www.am-online.com/news/finance/2024/02/09/...

In recent months, Concerns about social media and financial promotion rules and dealers making misleading ads

https://www.am-online.com/news/finance/2023/07/17/...

There's lots more - I can't be bothered linking to them all.

As an aside, Mrs phpe has a personal lease car deal that expires in December 2024 and upon checking a settlement figure, I saw that I can change any time this year without penalty/additional payment so thoughts are turning to what to replace it with. We're in a position to "pull the trigger" anytime and can afford to either buy a new/used car outright with our own savings or perhaps look at a new PCP/used PCP or maybe another personal lease. Undecided yet about what's right for us.

I made an enquiry about a used car she likes the look of from one local dealer of the biggest brands in the UK - the salesman was extremely keen to provide a monthly PCP quote (without knowing my circumstances or needs), has given a monthly repayment figure taken as a screenshot from WhatsApp and hasn't disclosed the APR or final repayment figure, and was more keen instead to provide a blurry low-resolution CitNow video taken on an potato and to contact him after his day off. Hardly professional, and has said he's loaded the figures already with paint protection and service plans, etc. The sort of guy that if I shook his hand, I'd count my fingers afterwards/

I made an enquiry on a new car from another local dealer for another big brand - salesman provided a really clear explanation of some of the likely deals & incentives, suggested it would be much better to come in for an appointment to go through the numbers properly, see what stock might be available and has come across (so far) as likeable and professional.

Guess which one I'll be going to see this weekend...

[phpe]

Caddyshack said:

I think you are looking at it as a prosecutor.

How about; the seller said and did the following:- "you want the best deal on this car and if you take finance I am able to help a bit on the car price as we are paid a commission, I am going to see how I can build you the best deal that my sales manager will let me do, I will get the lowest deal for you based on the overall profit we have to make on each car we sell, would you like to proceed on that basis? " Then they quote the 5% deal and ask the buyer to sign, here, here and here "as I have explained we get paid a commission for the sale and I am building that in to the whole deal of the car, this part says we will get the finance to charge 5%, that is the lowest I can go without pushing up the price of the car, are you happy with that?, if so please sign here to document that you understand this and you are happy to proceed. Please take time to read through the whole document before you sign and you have 14 days to cancel under the cooling off." They could even show the 3.5% rate and say, this is the base rate from the finance company, I cannot get it that low for you as we all have families to feed and a roof on the showroom.

In my experience, this is more how a sales person would, I think compliantly, sell the finance and I believe they would not be foul of this current issue if all of that had been recorded. I may have missed something but I am just typing on a forum, not a sales manager teaching sales guys to earn money, I am sure I could make it more slick and hit every part of the FCA guidelines.

These are considered examples of good and bad practices, as taught to those involved in sales

https://www.specialistautomotivefinance.org.uk/res...

[phpe]

wargriff said:

PF62 said:

Given that the "idle and feckless" in this issue were the car dealers and the banks with their lazy and unscrupulous behaviour, I really don't think they are being protected.

What the dealer did is apply a 'mark up' on the interest rate given by the lending bank. A difference in charges. This is the same as me buying something and hoping to get the product at wholesale cost and not expect a mark up. People are free to not purchase.

If you read the findings of both the regulator and the subsequent Ombudsman rulings on specific cases, this is not their findings of the nature of the relationship between the customer, the finance provider and the selling agent.

[phpe]

More on Close Brothers: dividends for 2025 (not just for this year) are even in doubt due to potential scale of redress issue.

https://www.am-online.com/news/finance/2024/02/15/...

[phpe]

OddCat said:

What about where the dealer made £1,000 on the finance but only after discounting the car by an extra £750 which he did only because the client was taking the finance ? Thus he makes a net extra £250 ?

What instead if the dealer had held the price of the car the same and accepted an incidental £250 commission on the finance by passing on the best finance rate available instead?

"Mr Customer, I simply can't get you a lower price for the car you want (taking into account my VAT, margin, preparation costs, warranty, etc), but what I can do for you is help ensure that the finance companies we introduce you to will give you THEIR best rates available

That will help ensure that you get my car at a fair price at a monthly instalment that is affordable to you"

[phpe]

valiant said:

ashleyman said:

Well I've just used the money expert tool to write and send off my emails to the various providers I have had over the years.

I doubt there is anything in the VWFS claims as it's VWFS but I am kinda hopeful the Santander and MotoNovo claims have some legs.

There's only 1 agreement I have no details of which seemed to go on forever but I have no details, not even sure who the lender was so can't do anything about that which is annoying.

Already had a reply from Santander (through Volvo) that they’ve never participated in these commissioned type loans (or whatever they’re called).

I suspect that when the dust settles later this year, it will predominately be used car HP and PCP deals that will fall foul of the assessments - new car deals tend to offer the exactly same rate/deposit contribution/other incentives to all eligible applicants, whereas used car rates are more likely to have been 'influenced' by the dealer/finance broker as to whatever they felt like offering to the punter sat in front of them

[phpe]

This could be batted back and forth forever and a day

Ultimately- the regulator and ombudsman have decided that influencing the rates should no longer be in the control of the broker, and I believe that is for the better

I’d personally go further and have the exact amount of commission to be paid put in big bold characters “We will pay Arthur Daley Motors £749.23 for introducing you to us” or similar.

I think the motor trade is going to become very familiar with the whole FCA concept of Consumer Duty very quickly this year when it comes to any type of regulated financial transaction.

[phpe]

Lloyds TSB/Blackhorse setting aside an initial £450m as a provision for claims.

Lloyds sets aside £450m for car finance probe https://www.bbc.co.uk/news/business-68367430

[phpe]

OddCat said:

They are intermediaries not brokers.

Brokers shop around for the best deal for you. An intermediary, on the other hand, acts as a link between people in order to try and bring about an agreement. Effectively a mediator. Acting for BOTH parties (the borrower and the lender).

Intermediaries are not an agent for the lender. They are authorised in their own right although I'm not sure how the FCA thought they were being paid.

If you have a look at various dealer chain websites (and I have) they all describe themselves as “We act as a credit broker”

These are all in the top 20 UK chains by turnover/market cap

[phpe]

alscar said:

Random_Person said:

I think you are over estimating there. Its around 40% of deals affected, and then roughly 800 per deal on an average 16k loan. Even if 2 of your 3 were successful, £1600 won't buy you a cabin. 4 nights in an Airbnb with a hot tub, maybe.

Is any potential “ compensation “ going to be based on a flat rate or adjustable on the actual quantum of loan ?

Hard to tell at this stage.

One of the reasons for the pause in complaint handling timescales is for the FCA to assess the situation and come up with a way for eligible complainants to be “compensated in an orderly, consistent & efficient way”.

[phpe]

alscar said:

I also slightly struggle with the concept that the likes of VWFS did this but am clearly no expert.

One of the long standing 'features' of the motor trade is that it is very incestuous and the relationship between the manufacturers, dealers and finance companies is blurred.

A company like Volkswagen AG has its own huge finance side, VWFS with billions of debts & loans made to buyers all around the world, collateralised against the value of the cars themselves. General Motors used to be described as a bank disguised as a car factory

Sticking with Volkswagen, VW franchisees are typically targeted on placing a huge amount of their financing business, new & used, with the captive finance provider VWFS as part of their main dealer franchise agreements. Some of those targets will include overall interest income, hence the previous temptation for the dealer to stick the average punter in a used car into a deal with as high a rate that the dealer thinks the punter will accept.

Volkswagen Group here in the UK typically has around 25% market share of all UK new car sales every year when all their brands (VW, Audi, Skoda, Porsche, and the rest) are taken into account, so VWFS clearly finance a huge amount of new cars every year, whether that be through personal lines such as HP, PCP or PCH or business leasing. VWFS also operate unit stocking finance arrangements to help the dealers have ample stock available at all times for sale.

Not only that, VWFS will also act the primary source of funding for used cars in VW dealerships up and down the country, so they are financing a huge amount of used VW Group and other brand cars as well. I think I read somewhere before that depending on the age/value of the car, 50-60% of used cars are bought on some form of dealer provided finance. The rest through cash savings and bank loans from the buyers.

Think about the lifespan of a typical car...VWFS finance it for the new buyer, finance it for the second buyer and possibly the third buyer also before it drops out of the VW dealer network or gets financed elsewhere.

That is three bites (at least) at the finance cherry on the same physical asset, likely offering the keenest rates and finance incentives for the new car to keep the factories churning out metal, then at each subsequent buyer, lending money again at higher rates.

Edited by phpe on Thursday 22 February 14:20

[phpe]

Sarnie said:

As a Mortgage Broker, this post made me laugh................