New rules set to protect car buyers from dealership finance rip-offs

New rules set to come into force in the new year will help protect drivers from unscrupulous dealers trying to trick them into overpriced finance deals.

From January 28, the new guidelines from the Financial Conduct Authority (FCA) will ban dealers from linking commissions to finance rates and force them to increase clarity around the commissions they make.

The rules outlaw the use of “discretionary commission models” which allows dealers and finance brokers to set their customers’ interest rates then earn a commission linked to that rate. A higher interest rate results in a higher pay-out for the dealer or broker but costs the buyer more.

The FCA says the widespread use of this model is an incentive for dealers to act against the best interests of their customers and promote unnecessarily expensive deals. It is thought the new rule could save UK consumers £165 million a year in lower rates.

The FCA found some dealers were deliberately charging customers a higher-than-necessary interest rate in order to earn more commission (Photo: Shutterstock)

The changes follow an FCA investigation which found dealers overcharging individual customers by thousands of pounds. That investigation prompted a consultation in 2019 to look at the matter and how customers could be better protected.

At the same time, the FCA is changing the way dealers must tell customers about the commission they are paying. The changes cover other sectors as well as the motor finance one but mean that all consumer credit customers must be given more relevant information about any agreement they sign up to.

Christopher Woolard, the FCA’s interim chief executive, said: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”

A study earlier in 2020 found that some car buyers are paying as much as £2,000 too much when they buy a new car due to fees associated with finance deals. Additional fees such as up-front arrangement costs and additional mileage charges are costing motorists an average of £,1200 over four years, according to the investigation by Admiral.