Car dealers: Most consumers unaware of commissions
The government has applied to intervene in the Supreme Court hearing on motor finance, expressing concern that the Court of Appeal ruling could have a significant and potentially damaging impact on the market.
The hearing has been confirmed for 1-3 April and news of HM Treasury’s application came as a surprise – and one criticised by a leading practitioner.
It comes as new research shows that the majority of consumers affected by the non-disclosure of commissions would seek compensation.
The Court of Appeal ruling, known as Johnson, found it unlawful for car dealers, acting as brokers, to receive a commission from the lender without obtaining the customer’s informed consent.
The appeal relates to the application of the common law, equitable principles and the Consumer Credit Act, rather than Financial Conduct Authority (FCA) rules. The finance industry has reacted with alarm and estimates of potential liabilities running into many billions.
A Treasury spokesman said: “We want to see a fair and proportionate judgement that ensures compensation to consumers that is proportionate to the losses they have suffered, and allows the motor finance sector to continue playing its role in supporting millions of motorists to own vehicles.”
The intervention notes the Treasury’s concerns about the potential implications of the judgment, including that it may not have fully taken into account the existence of FCA rules, that the uncertainty caused could undermine the competitiveness of the UK’s regulatory framework, and that the approach to redress suggested by the Court of Appeal may not be proportionate to the detriment incurred by the consumer.
In the year to September 2024, over two million cars were bought on finance and there are currently over seven million such outstanding finance agreements – the Treasury said it was worried that the Court of Appeal’s judgment could have a significant and potentially damaging impact on the motor finance market.
Coby Benson, a solicitor at Bott & Co, one of the law firms active in representing affected consumers, argued that the Treasury’s stance would provide wrongdoers with a ‘get out of jail free card’, which he said “would only serve to encourage large-scale breaches of the law, ultimately at the expense of consumers”.
He said the Johnson decision simply affirmed the law “as it has been understood for over a century”, with the Court of Appeal referencing cases dating back as far as the 1800s.
“The cases now going to the Supreme Court involve individuals who took out agreements between 2014 and 2017. By that time, the law was already well-established. Lenders and brokers have always been aware of the risks, but they must have concluded—whether deliberately or naively—that the risk was worth the reward.
“It is also incorrect to suggest that motor finance brokers believed FCA compliance would shield them from liability elsewhere. Like any business, brokers must comply with various regulations beyond the FCA’s rules.”
Separately, research from consumer rights group Consumer Voice has found that 44% of people who took out a loan in the past four years did not know whether their dealer received commission for arranging their finance deal – a further 23% found out after signing an agreement and only 5% said they were sure no commission was paid.
Consumer Voice – which has also applied to intervene at the Supreme Court – surveyed 2,050 people who had car finance loans arranged by their dealer and only 28% said they agreed to commission before signing up.
Just 4% said they researched other options before negotiating a better price with their dealer – and 67% of people took the deal on the spot.
Over half of car loan customers (55%) from post 2021 said they would claim compensation if it was available and they knew they were eligible – only 6% said they were extremely unlikely to.
The FCA is separately investigating discretionary commission arrangements (DCA), where some car finance lenders allowed dealers to set a higher rate of interest in return for higher commission, a practice only banned in 2021.
Of the 375 people in the survey who had taken out car finance loans before then, 44% were not aware of DCAs, and only 11% were very aware.
More than seven in ten people (72%) who knew their agreements were based on DCAs said they would claim compensation if and when it becomes available.
Alex Neill, co-founder of Consumer Voice, said: “People trust their car dealer to act in their best interests when arranging finance. Yet, this trust is clearly being abused by some dealers in the market.
“It is the responsibility of the dealer to ensure that car buyers both know of and agree to a commission payment.
“Car dealers and lenders know that the vast majority of people don’t shop around for their car finance – and most people told us they agreed to the deal on the spot. This makes it even more important that dealers are transparent and upfront about the existence of commission payments and exactly how much they stand to gain.”
‘ A Treasury spokesman said: “We want to see a fair and proportionate judgement” ‘
What’s that about the separation of powers that I keep reading about ?