City watchdog bans commission between car dealers and lenders

Linda J. Dodson

People buying new cars on finance could save up to £165m per year after the City watchdog banned dealers from hiking interest rates in return for a commission.

At present, car dealerships can choose to increase the rate of interest that customers pay above what the credit lender has determined. In return for charging customers at a higher rate, the dealer is rewarded with a commission by the lender.

The Financial Conduct Authority estimated that this practice costs consumers £165m per year in additional interest payments, and has now set out new rules to stop the practice.

James Hind, of car marketplace Carwow, said: “We welcome anything designed to improve transparency for the consumer around car buying, and ensure that they are getting a fair deal. Anything that boosts buyer confidence is good news for the recovery of the industry.” 

However, John Perez of DWF Law, who represents motor finance lenders and leasing companies, said the latest rules still left some questions unanswered.

The car industry is likely to take a financial hit from the loss of commission revenue, he said, which will need to be made up elsewhere.

For lenders, this could lead to a rise in rates for at-risk customers. “Vulnerable customers that are at a high credit risk may well end up paying more as lenders raise interest rates,” he said.

For car dealers, if commissions are removed, the only way to make profit is on the car itself, which would lead to a rise in car prices, he added.

The FCA said it will also enforce changes to the way customers are told about the commission they are paying to ensure they receive more relevant information. The new rules will take effect from January 28 2021.

Christopher Woolard, of the FCA, said: “By banning this type of commission, where brokers are rewarded for charging customers higher rates, we will increase competition and protect consumers.”

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