Car sales commission law change to 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 green-lit a scheme that it claims will save car-buyers £165 million a year.

The FCA (Financial Conduct Authority) will ban methods used by car dealers and brokers that see them receive a 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'. The changes will come into force on 28 January 2021.

Car dealership

Preventing the use of this type of commission will ultimately remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance. 

The FCA's Interim Chief Executive, Christopher Woolard, said: 'By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers. We estimate that consumers could save £165 million because of today's action.'

Adrian Dally, Head of Motor Finance at the Finance and Leasing Association, added: 'This is a welcome announcement from the FCA as it provides clarity for the industry. We are also pleased that the regulator accepted our point about the need to monitor the consumer hire market as the ban on discretionary commissions does not extend to personal contract hire agreements.'

Changes to the way in which customers are told about commission they are paying will also happen.

How does the discretionary commission model work?

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.

2019 Ford Fiesta Trend