What is Discretionary Commission?

Discretionary commission in motor finance was when the interest rate on your car finance agreement could be changed by the dealer or broker you worked with. Essentially, before 2021, some lenders gave them the power to increase the interest rate above what the best rate the lender would give the customer, which meant that they earnt more money (through commission) from the deal, based on how much they raised the rate by. The issue was that many buyers didn’t know this was happening, which led to concerns about fairness and transparency. It was a practice that benefited the dealer or broker at the expense of the buyer, without the buyer's clear knowledge.

The Role of Brokers and Dealers

Brokers and dealers, acting as intermediaries (the people in the middle) between you the consumer and lenders, are central in arranging finance agreements. Before 2021, they sometimes had the ability to adjust the interest rates that you paid, which meant that they could directly influence their earnings from commission at the expense of you the consumer. By setting higher interest rates, the consumer ended up paying more over the life of their loan which meant more profit for the broker or dealer. This conflict of interest between commission earnings and consumer costs was at the centre of regulatory concerns, which highlighted the need for fairer finance practices.

The Controversy Surrounding Discretionary Commission

Consumer Impact

The discretionary commission model's impact on consumers was double-sided: it not only hid the true cost of financing their cars, but also led to potential higher overall finance charges. The lack of transparency and fairness in how finance costs were determined and disclosed to consumers made people call for regulatory intervention.

Regulatory Concerns

The FCA's (Financial Conduct Authority) concerns revolved around the moral implications of discretionary commission arrangements. The regulator highlighted the conflict of interest and the potential for such arrangements to lead to finance agreements being quoted that were not in the best interest of consumers. The FCA's focus was on improving market transparency and making sure that finance agreements were made with a clear understanding of their terms and costs.

The FCA's 2021 Ban

In response to these concerns, the FCA issued a ban in 2021 targeting the discretionary commission model. This ban specifically prohibited brokers and dealers from adjusting interest rates to earn higher commissions from consumers, with the overall aim to remove incentives for overcharging consumers.

Goals of the Regulation

The change in regulation aimed to protect consumers by ensuring that finance agreements were more transparent and fair. By removing brokers’ and dealers’ ability to manipulate or tamper with interest rates for their benefit, the FCA wanted to create a more consumer-friendly motor finance market.

Rise in Complaints After the 2021 Ban

Even after the ban was put into place, there was an increase in consumer complaints, particularly about agreements made before the regulation came into effect in 2021 (often referred to as historic agreements). The FCA maintained its criticism of the motor finance market, and emphasised its commitment to upholding consumer protection and addressing any ongoing issues from past practices.

FCA’s 2024 Interventions Explained

In January 2024, the FCA decided to take a closer look at historic car finance agreements that included discretionary commissions. As part of this they implemented new temporary rules for how car finance companies should deal with complaints around discretionary commission. Usually, companies have an 8 week deadline to respond to complaints, but now they're pausing this for commission complaints to try and aim for more thoroughly investigated and consistent consumer outcomes.

What This Means for You as a Consumer

If you suspect that your finance agreement may have been subject to discretionary commission, it is advisable to review your contract and seek clarification from your lender. Understanding whether your agreement falls within the scope of these practices is the first step towards making a complaint and potentially seeking compensation. 

The path to receiving compensation involves a structured process, made easier by the FCA's interventions. You as a consumer should stay informed about the FCA's findings and any proposed schemes to put things right, preparing to act if you’re eligible for compensation.

The Future of Motor Finance in the UK

The FCA's actions are set to have a lasting impact on the motor finance industry in the UK, taking a step towards greater transparency and consumer protection. This is likely to influence how finance agreements are structured and marketed, to make sure that consumers are better informed and that their interests are safeguarded and kept as the priority.