Buyers set to have longer to complain after car finance commission ruled unlawful

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.