Discretionary Commission Arrangements and the FCA Investigation

The Financial Conduct Authority (“FCA”) has recently announced it is using it’s powers under section 166 to investigate the historical use of discretionary commission arrangements (“DCA”) in the motor finance industry.

As a reminder the FCA’s primary area of responsibility is to regulate consumer credit with consumers being defined as individuals operating in a personal capacity, as a sole-trader or within a partnership of three or less individuals. Given that the payment of commission by finance companies in return for business introductions from equipment suppliers or finance brokers is a common feature within many markets, questions are understandably being raised as to whether the FCA might, in the future, launch a wider investigation into the matter. At this stage, however, it is important to note that, whilst the number of customers involved are huge, the FCA are addressing one specific form of commission applied to one specific market involving only certain finance agreements.

The specific type of commission arrangement involved is one which allowed the person arranging the finance (broker) to adjust the interest rates they offered customers for vehicle finance. Typically, under this type of scheme, the higher the interest rate, the more commission the broker received. This was known as a discretionary commission arrangement and created an incentive for brokers and dealers to increase how much people were charged for their car finance agreement with the customers being unaware that such arrangements applied. This practice was banned by the FCA in January 2021, but there have since been a high number of complaints from customers about how much they were charged on finance agreements provided before the ban.

The FCA investigation which is now underway will apply where a customer used car finance to buy a motor vehicle, for example a car, van, campervan or motorbike, before 28 January 2021 (this includes hire purchase agreements, such as Personal Contract Purchases) and that the lender or broker had a discretionary commission arrangement. The investigation excludes any deal where finance was used to buy a vehicle on or after 28 January 2021 and all deals involving a hire agreement, such as a Personal Contract Hire or any form of leasing where there was no option for the customer to acquire title to the equipment.

Whilst the investigation is in progress the FCA are pausing the complaints process to ensure that if customers are owed compensation, they will get it in the best way possible. As such the normal 8-week deadline for providers to respond to complaints about car finance involving this type of commission will not apply. Customers can still complain to their provider, but they will not have to respond to such complaints until after 25 September 2024, at the earliest.

The FCA investigation and the scale of potential compensation claims will undoubtedly raise general questions about the types of commission arrangements that apply within the finance industry and all concerned will be following the FCA investigation with keen interest.

ITV recently screened an episode of the Martin Lewis Money Show Live which addressed the issue of commission payments offered by finance companies to those involved in the sale of vehicles and actively encouraged consumers to write to their finance companies to ask whether DCA model was used in their agreements.