The UK’s financial watchdog has announced a crackdown on the way car finance is sold following complaints that dealers are ripping off customers.
The Financial Conduct Authority (FCA) has said it will ban the practice of finance brokers and retailers paying dealers commissions linked to the interest rate of the loans they sell.
It says such incentive commissions have led to dealers “acting against customers’ interests” by encouraging them to take out finance deals with unnecessarily high interest rates.
Earlier this year the FCA conducted an investigation into the commissions paid on loan agreements and said it raised “serious concerns” about how dealers and brokers were acting.
An estimated 90 per cent of all new car sales involve some form of finance agreement and the FCA estimates that cracking down on commissions could save UK consumers £165 million a year by removing the financial incentive for brokers to increase the interest rate.
Customers losing out
Christopher Woolard, executive director of strategy and competition at the FCA said: “We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance. By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”
The FCA is also proposing to make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These would apply to many types of credit brokers and not just those selling motor finance.
Industry observers have welcomed moves to make the market more transparent and predicted it could make finance more affordable for drivers.
James Fairclough, CEO of AA Cars, said: “Transparency and clarity are essential for the car finance industry to serve customers properly, and the FCA’s proposal would make it easier for car buyers to compare different deals and shop around.
“It could also bring the price of finance down if it triggers greater competition on interest rates between lenders and removes the distorting effect of discretionary broker commission.”
Scott Cargill, CEO of Admiral Financial Services said: “For far too long, there has been a lack of transparency around how some car dealers make commission on sales. This has resulted in some customers overpaying for their loans by millions of pounds a year, but not really having any real idea by how much.
“Now the FCA has shone a light on some of the shady ways commission is made, we expect to see more competition in the market and better deals for consumers.”
Amanda Stretton, motoring editor at Confused.com, added: “People are being backed into a corner and signing up to high-interest finance that they may not be able to afford. This is all because dealers want to increase their commission. It’s about time for a crackdown on this practice. Car finance is confusing enough without added pressure from dealers.”