WESTON-SUPER-MARE, ENGLAND - SEPTEMBER 14: New and nearly new cars are displayed for sale on a forecourt of a car dealership on September 14, 2017 in Weston-super-Mare, England. Over 80 percent of new cars in the UK are currently financed through personal contract plans (PCPs), which last year led to over £30bn in car loans. A number of economists have raised concerns that consumer debt levels in the UK are at a dangerously high level and fear it could help spark another credit-crunch financial crash, similar to what happened ten years ago in 2007. (Photo by Matt Cardy/Getty Images)
© Matt Cardy/Getty Images

Buyers using debt to finance car purchases may have been overcharged on their interest payments by £1,000 a year or more because of the way lenders pay commissions to motor dealers, Britain’s financial regulator said.

Following an investigation into the booming motor credit sector, the Financial Conduct Authority said it had found “some motor dealers are overcharging unsuspecting customers over £1,000 in interest charges in order to obtain bigger commission payouts for themselves”.

The regulator added: “We estimate this could be costing consumers £300m annually. This is unacceptable and we will act to address harm caused by this business model.”

So far, the FCA has not changed any rules, but the regulator said on Monday that it was “assessing the options for intervening in the market which would address the harm it has identified”.

It said it was “considering changes to the way in which commission works” in the industry.

The rapid growth of the car loan market has been a source of regulators’ concerns for some years. More than 90 per cent of private car sales in the UK in 2018 were financed by loans from banks and other credit providers, according to the Finance And Leasing Association.

People who use credit to buy their cars often do so with a personal contract purchase plan. Arranged by car dealers or online motor finance brokers, these involve paying a deposit, paying a depreciation charge over 24 or 36 months that is similar to interest on a loan, and then either handing the vehicle back, trading it in for a new one or paying off the rest of its value and keeping it.

The rise of such vehicle financing has boosted sales of top marques such as BMW, Lexus and Audi, which many UK consumers may not be able to afford to buy outright. It has also helped lenders active in this market, such as Santander, Paragon, Shawbrook and Zopa, expand their loan books in the aftermath of tight mortgage curbs that regulators have applied since the 2008 credit crisis.

The FCA said in its report that more than 95 per cent of organisations that arrange car finance, such as car dealership franchises, used commission structures that provided “strong incentives” to arrange deals for consumers that “at higher interest rates”.

The regulator stepped back from warning that the growth of car finance was a risk to the British economy, however. Banks could become exposed to losses from car finance if too many motorists hand their cars back at the end of the finance term and the used cars cannot be sold on at a decent price.

“The largest lenders were adequately managing the prudential risks from a potential severe fall in used car values,” the FCA said.

The FCA warned motor dealers and car finance providers on their practices last March, telling them it was unsustainable and unacceptable for salespeople to put loan packages together based on how much commission it would earn them.

Adrian Dally of the Finance and Leasing Association, which represents car finance providers, said the FCA’s concerns about commission structures were “based largely on out-of-date information” and “does not reflect the very considerable progress the market has already made in moving away from such structures”.

Mr Dally said the FLA’s own survey data showed that more than 80 per cent of its membership no longer used the type of commission structures that the FCA had criticised.

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