Law changes could save car-buyers ‘£165 million a year’

  • British car-buyers being ripped off
  • Salespeople making money off charging higher interest rates
  • Law change could provoke market shift 

The UK's financial regulatory body has announced a scheme that it claims will save car-buyers £165 million a year.

The FCA (Financial Conduct Authority) is planning to ban some methods used by car dealers and brokers that see them receive commission that is linked to the interest rates that customers pay. The FCA says that 'this creates an incentive for brokers to act against customers' best interests'.

Car dealership

Some retailers and brokers allow salespeople to make a commission based on the interest rate they charge the customer. The higher the interest rate, the higher the commission.

Interest rates are generally tied to ratings such as your credit score. Theoretically, people with better credit scores get lower interest rates. If salespeople's commissions are tied to charging higher interest rates, higher interest rates will obviously be charged.

An example: A used £11,000 Ford Fiesta on a typical PCP deal with different interest rates. (These vary on depending on dealers)

Interest rate: 3.4%
Agreement length: 48 months
Deposit: £1123
Monthly payments: £190
Optional final payment to buy the car: £3,099

Interest rate: 4.8%
Agreement length: 48 months
Deposit: £1123
Monthly payments: £201
Optional final payment to buy the car: £3,099

Using the same parameters, but with the interest rate increased from 3.4% to 4.8%, your monthly payments would rise to £201 per month.

That's an increase of £11 per month, or an additional £528 over the period of the 48-month agreement.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: 'By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.'

Proposals are also in place to change the way customers are told about commissions, in order to increase transparency and relevance for them.

James Fairclough, CEO of AA Cars, adds: "Customers are poorly served if they are not shown all the options best suited to them, whether through a lack of transparency, deliberate misinformation or because brokers are trying to steer them toward a particular product purely in order to secure a discretionary commission.

"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.'

The FCA is consulting on the new rules until 15 January 2020 and plans to publish final rules later in 2020.