When you buy a used car on finance, you typically negotiate with or through the dealer but the agreement is with a finance company or bank such as Black Horse (Lloyds Banking Group), Santander or MotoNovo.  There is an operating agreement which sets out the relationship between the dealer and the finance company, this includes the terms around any commission the dealer receives for selling the finance.

Until January 2021, the operating agreement typically included the dealer being paid ‘discretionary commission’.  Under this model, the dealer had full discretion to set the interest rate you paid within a certain band (for example between 5% and 15%), but under these agreements, the higher the interest rate agreed, the higher rate of commission the dealer would make.

In practice, this incentivises dealers to offer customers the highest interest rate possible, rather than competing to offer the lowest and most attractive rates.

For example, the dealer might receive 12% commission if they agreed finance at 14% APR or 5% commission if they agreed finance at 9% APR but no commission at all if they agreed finance at lower than 6% APR.  These numbers are illustrative only as the commission agreements between the dealers and finance companies are not public.

The UK Financial Conduct Authority launched an investigation into discretionary commission.  In its Final Findings, it stated that discretionary commission arrangements may be leading to significant consumer harm, and some customers are paying significantly higher interest rates than they would otherwise have paid under an alternative commission model.

The FCA banned this conduct with effect from 28 January 2021.  The ban protects consumers on a forward-looking basis but does not recover the significant losses that consumers have already suffered (and in some cases continue to suffer) under finance agreements entered into before 28 January 2021.

The claims are to recover these losses on behalf of consumers who entered into finance agreements for used cars with Black Horse, Santander or MotoNovo.

Latest Developments

Since filing the Claims, the FCA announced on 11 January 2024 that it will undertake diagnostic work in the motor finance market. The FCA stated the following:

“There have been a high number of complaints from customers to motor finance firms claiming compensation for commission arrangements prior to the ban. Firms are rejecting most complaints because they consider that they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements. The Financial Ombudsman Service has considered some complaints rejected by firms. It found in favour of complainants in two recent decisions [see here and here]. This is likely to prompt a significant increase in complaints from consumers to firms and the Financial Ombudsman. Claims have also been brought in the County Courts, some of which have been upheld. So, there is significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.”

Consequently, the FCA announced that it will be using its “powers under s166 of the Financial Services and Markets Act 2000, to review historical motor finance commission arrangements and sales across several firms.”

The full announcement can be found here: https://www.fca.org.uk/news/statements/fca-undertake-work-motor-finance-market.

The announcement was accompanied by a Policy Statement, which can be found here: https://www.fca.org.uk/publications/policy-statements/ps24-1-temporary-changes-handling-rules-motor-finance-complaints

The FCA stated that it plans to communicate a decision on its next steps by 24 September 2024 at the latest.

In light of the FCA’s announcement, the parties to the claims have agreed to stay the proceedings until 25 November 2024. A “stay” is a formal pause of the litigation, so the case will not progress while the stay is in place. This was approved by the Competition Appeal Tribunal, in its Order dated 8 April 2024.

Accordingly, the proceedings are currently stayed until 25 November 2024.