Car finance - hidden commission payments

[Stupot123]

PF62 said:

You have been misled by the annotation in the FCA handbook that indicates CONC 4.5.3 was a new rule introduced on 28/01/2021 when in fact there had been a previous CONC 4.5.3 rule which had been in place since 2014 that covered this case -

www.handbook.fca.org.uk/handbook/CONC/4/5.html?dat...

I am not wanting a fight, you have a strange tone, I am asking questions, as I don’t understand the situation.

Hypothetically I am a sales manager in 2008, so during the period being looked into. I am sitting at my desk stacking a deal for a customer. I have a cost price for the car and the finance, I add my margin to both and I put the deal to the customer.

The customer accepts.

There are no commission disclosure rules and no CONC rules. In fact I am targeted by my own company for F&I IPRU, income per retail unit, as they get 80% of the difference in charges commission structure, and I am targeted on rate spread by the finance company as they get the other 20% and they priced the package on a higher average APR sell out.

FSA know this is how the industry is set up and operates.

What rule have I broken?

[PF62]

Forester1965 said:

Was the grey area that commissions were being disclosed, but the mechanism that decided how much they were, wasn't?

No.

The issue was that as soon as there was a discretionary commission the broker ceased being impartial.

If the broker had truly been impartial they would have recommended the 2.5% rate, but they didn’t because the 5.5% rate earned them more commission.

And in addition the customer wouldn’t have bought the 5.5% rate had they been informed of the 2.5% rate that they had been accepted for.

[Forester1965]

I understand that.

I meant specially in relation to CONC 4.5.3 that you posted a few posts before this one.

Were dealers disclosing that there was commission, as per the requirement, but not how that commission was calculated (and the obvious problem with it)?

[Zero Fuchs]

PF62 said:

No.

The issue was that as soon as there was a discretionary commission the broker ceased being impartial.

If the broker had truly been impartial they would have recommended the 2.5% rate, but they didn’t because the 5.5% rate earned them more commission.

And in addition the customer wouldn’t have bought the 5.5% rate had they been informed of the 2.5% rate that they had been accepted for.

Just wanted to say thanks for the info and clarification. It's been an interesting read.

Although somehow I think people are still going to blame the consumer.

[PF62]

Stupot123 said:

PF62 said:

You have been misled by the annotation in the FCA handbook that indicates CONC 4.5.3 was a new rule introduced on 28/01/2021 when in fact there had been a previous CONC 4.5.3 rule which had been in place since 2014 that covered this case -

www.handbook.fca.org.uk/handbook/CONC/4/5.html?dat...

I am not wanting a fight, you have a strange tone, I am asking questions, as I don’t understand the situation.

Hypothetically I am a sales manager in 2008, so during the period being looked into. I am sitting at my desk stacking a deal for a customer. I have a cost price for the car and the finance, I add my margin to both and I put the deal to the customer.

The customer accepts.

There are no commission disclosure rules and no CONC rules. In fact I am targeted by my own company for F&I IPRU, income per retail unit, as they get 80% of the difference in charges commission structure, and I am targeted on rate spread by the finance company as they get the other 20% and they priced the package on a higher average APR sell out.

FSA know this is how the industry is set up and operates.

What rule have I broken?

The case the FCA has ruled on is 2016 so the 2014 rules applied.

And so if in 2016 you put a “deal” for the finance to the customer where you chose a product with a higher interest rate because it earned you more commission, despite the customer being approved for a lower rate with lower commission, then you broke the 2014 rules, especially if you didn’t disclose to the customer what you were doing.

Now back in 2007 - well as I have demonstrated the wording to FCA rules change over time, so I am sure you can look up what the rules said in 2007 to see if what you did complied with them.

[PF62]

Forester1965 said:

I understand that.

I meant specially in relation to CONC 4.5.3 that you posted a few posts before this one.

Were dealers disclosing that there was commission, as per the requirement, but not how that commission was calculated (and the obvious problem with it)?

The argument from the bank was that the broker only needed to disclose the commission if the customer asked.

The argument from the FCA was that the mere existence of the discretionary commission meant the broker was no longer impartial even if they disclosed the commission, unless they also disclosed that the customer was approved for a lower rate with a lower commission.

As soon as the broker chose to ramp up the rate and earn a bigger commission then they were no longer being fair to the consumer.

[Forester1965]

Cheers.

[PF62]

Stupot123 said:

Hypothetically I am a sales manager in 2008, so during the period being looked into. I am sitting at my desk stacking a deal for a customer. I have a cost price for the car and the finance, I add my margin to both and I put the deal to the customer.

And just to add, there was - or rather shouldn’t have been - a single ‘deal’.

For the deal involving selling the car and buying a trade in then the sales manager can be as partial and unfair to the customer as they want.

However when that aspect was concluded then they are not wearing a sales manager hat but a finance broker hat and they do have to be impartial and fair to the customer.

The problem is dealerships forgot there were two completely distinct roles and muddled them together to get the deal done with the biggest profit.

[Stupot123]

PF62 said:

The case the FCA has ruled on is 2016 so the 2014 rules applied.

And so if in 2016 you put a “deal” for the finance to the customer where you chose a product with a higher interest rate because it earned you more commission, despite the customer being approved for a lower rate with lower commission, then you broke the 2014 rules, especially if you didn’t disclose to the customer what you were doing.

Now back in 2007 - well as I have demonstrated the wording to FCA rules change over time, so I am sure you can look up what the rules said in 2007 to see if what you did complied with them.

Right, so we agree that it’s new rules that have been broken, but historically when they didn’t exist. So like my speeding analogy below.

Stupot123 said:

No one broke any rules at the time.

It’s subsequently been deemed unfair practice and potentially they are now looking to retroactively punish.

I wonder about the legality of that.

I mentioned earlier, it would be like doing 50mph on a 50 limit road, a week later its changed to a 30mph limit and they then try and charge you with speeding for the previous week.

And as I also said, the current regime that the FCA put in place in 2021 and is still current, isn’t really all that different.

So this post absolutely stands, I wonder if they will be able to make that stick legally, applying new rules to historic transactions, sets a weird precedent, I take it that’s what they are try to work out just now. Quite a public difference of opinion between FCA and FOS, as the FCA were happy to draw a line in 2021 under it and leave the past.

And as I said, there is a future mess in town too, the structure that the FCA introduced in 2021 that is still currently being used is almost exactly the same in principle. They get a base rate, they add their margin and they sell it out to the customer.

[Dixy]

PF62 said:

Stupot123 said:

I’ve read both the rulings many times, the answer to the question I asked isn’t in there?

The CONC rules that it refers to look to be current, yet being applied retrospectively, which is the bit I don’t understand.

You have been misled by the annotation in the FCA handbook that indicates CONC 4.5.3 was a new rule introduced on 28/01/2021 when in fact there had been a previous CONC 4.5.3 rule which had been in place since 2014 that covered this case -

www.handbook.fca.org.uk/handbook/CONC/4/5.html?dat...

FCA said:

A credit broker must disclose to a customer in good time before a credit agreement or a consumer hire agreement is entered into, the existence of any commission or fee or other remuneration payable to the credit broker by the lender or owner or a third party in relation to a credit agreement or a consumer hire agreement, where knowledge of the existence or amount of the commission could actually or potentially:

(1) affect the impartiality of the credit broker in recommending a particular product; or
(2) have a material impact on the customer's transactional decision.

The FCA considered that the discretionary commission given to the broker for pushing the rate up to 5.5% when they knew the customer had already been accepted at 2,5% affected their impartiality.

Also had the customer been informed that they were only being sold the 5.5% rate because of the commission and that they had been accepted at 2.5% then they wouldn’t have agreed to the deal.

Edited by PF62 on Saturday 10th February 08:33

Excellent post.
This explains why what has been done since 2014 was against the rules.

[Caddyshack]

Forester1965 said:

Was the grey area that commissions were being disclosed, but the mechanism that decided how much they were, wasn't?

I agree, the broker should have said (we are paid a commission for arranging the finance) and everyone knows the nice salesman is not arranging the finance for us as they are just being nice.

It seems to me that the problem is there is not an easy salesy way of saying that if you buy direct without me lumping in a bit you can buy it cheaper. It’s the discretion to add a bit that causes an issue.


This may open a can of worms…..you know when the lovely estate agent says “use our friendly solicitor” some of them are able to load the cost up to get that back to themselves. They can add on a discretionary amount up to about £250 per transaction on certain platforms. There must be loads of other industries with this.

I used to sell photocopier paper over the phone, some companies bought a lorry full per 2 weeks, they could have bought that amount from the paper mill I used but I bought it, added what I could in margin and sold it on….should we have been saying I have added £x to make a profit?

[Forester1965]

B2B should be treated differently to consumers. They're professional buyers better able to work out what is and what isn't a good deal and enjoy greater negotiating power than consumers.

Referral schemes such as those between estate agents, solicitors and mortgage brokers, I think those should be disclosed; there's no valid reason not to.

[PF62]

Stupot123 said:

PF62 said:

The case the FCA has ruled on is 2016 so the 2014 rules applied.

And so if in 2016 you put a “deal” for the finance to the customer where you chose a product with a higher interest rate because it earned you more commission, despite the customer being approved for a lower rate with lower commission, then you broke the 2014 rules, especially if you didn’t disclose to the customer what you were doing.

Now back in 2007 - well as I have demonstrated the wording to FCA rules change over time, so I am sure you can look up what the rules said in 2007 to see if what you did complied with them.

Right, so we agree that it’s new rules that have been broken, but historically when they didn’t exist.

No we don’t agree.

The case involves the 2014 rules which were in force when the deal was done in 2016.

The subsequent change to the rule in 2021 is irrelevant as the 2014 rule had been broken.

Stupot123 said:

So like my speeding analogy below.

Stupot123 said:

No one broke any rules at the time.

It’s subsequently been deemed unfair practice and potentially they are now looking to retroactively punish.

I wonder about the legality of that.

I mentioned earlier, it would be like doing 50mph on a 50 limit road, a week later its changed to a 30mph limit and they then try and charge you with speeding for the previous week.

And as I also said, the current regime that the FCA put in place in 2021 and is still current, isn’t really all that different.

So this post absolutely stands,

Umm… no.

To revisit your analogy it would be like doing 30mph on a 20mph road but thinking that since everyone else was doing 30mph it was fine.

And then to make it abundantly clear that the limit was 20mph they put in physical traffic calming that made it impossible to do more than 20mph.

Doing 30mph was never ok, and it is just that now with the traffic calming people can’t break the 20mph limit, but they are prosecuting people who broke the speed limit that was in force in the past.

[Caddyshack]

Forester1965 said:

B2B should be treated differently to consumers. They're professional buyers better able to work out what is and what isn't a good deal and enjoy greater negotiating power than consumers.

Referral schemes such as those between estate agents, solicitors and mortgage brokers, I think those should be disclosed; there's no valid reason not to.

There is one valid reason not to…the customer would take the option not to pay more than they need to and the broker then has to make up the money and stay in business another way….we end up in the scenario of this thread.

I am glad that we disclose our procuration fee on all mortgage documents as I wouldn’t fancy paying back what I have earned from mortgages over the last 30 years.

[Stupot123]

PF62 said:

Umm… no.

To revisit your analogy it would be like doing 30mph on a 20mph road but thinking that since everyone else was doing 30mph it was fine.

And then to make it abundantly clear that the limit was 20mph they put in physical traffic calming that made it impossible to do more than 20mph.

Doing 30mph was never ok, and it is just that now with the traffic calming people can’t break the 20mph limit, but they are prosecuting people who broke the speed limit that was in force in the past.

Ok, I’ll agree to disagree, good day!

[Forester1965]

Caddyshack said:

There is one valid reason not to…the customer would take the option not to pay more than they need to and the broker then has to make up the money and stay in business another way….we end up in the scenario of this thread.

I am glad that we disclose our procuration fee on all mortgage documents as I wouldn’t fancy paying back what I have earned from mortgages over the last 30 years.

The consumer will have to pay the same amount, whichever party collects it. If the estate agent no longer gets the kick back on the referral, theyll have to lump the missing money onto their own fees and so on.

I used to have part ownership of an IFA business, we were predominently pensions, so were not allowed to collect commissions on those products. Equity release we had proc and advice fees to collet and a £200 kick back from the law firm hired to do the conveyancing aspect. All was declared.

[PF62]

Stupot123 said:

Ok, I’ll agree to disagree, good day!

Are you disagreeing that there rules in place in 2014 that applied to the 2016 case?

Are you disagreeing that those 2014 rules were broken?

Or are you flouncing off now it has been shown to you that this isn't applying the 2021 rules retrospectively!

[ashleyman]

I’ve had 4x VWFS (on brand new cars), 1x Santander (on a used car and I remember saying no to deal as it was too expensive and then a few days later they came back with a smaller interest that I was ok with paying), 1x MotoNovo (used car) + 1 other (used car) that I don’t remember but those payments never seemed to end until I sold the car and cleared the finance.

I’ll probably send some emails but have no expectations.

[Caddyshack]

Forester1965 said:

Caddyshack said:

There is one valid reason not to…the customer would take the option not to pay more than they need to and the broker then has to make up the money and stay in business another way….we end up in the scenario of this thread.

I am glad that we disclose our procuration fee on all mortgage documents as I wouldn’t fancy paying back what I have earned from mortgages over the last 30 years.

The consumer will have to pay the same amount, whichever party collects it. If the estate agent no longer gets the kick back on the referral, theyll have to lump the missing money onto their own fees and so on.

I used to have part ownership of an IFA business, we were predominently pensions, so were not allowed to collect commissions on those products. Equity release we had proc and advice fees to collet and a £200 kick back from the law firm hired to do the conveyancing aspect. All was declared.

Yes, I think that most of us on the IFA/ broker side know to fully disclose. I started in the days of big pension commissions such as 40% of first 2 yrs premiums but even that was disclosed on an illustration that the client had to sign. We used to commission sacrifice back in to the pension so in effect we could have up to 40% but most too less. We could even do it on PEPs but we had a company rule to refund all off the commission back in to remove that.

I suspect the downfall of the broker of finance is the hidden bit and not the act of being able to add the fee.

[Stupot123]

PF62 said:

Are you disagreeing that there rules in place in 2014 that applied to the 2016 case?

Are you disagreeing that those 2014 rules were broken?

Or are you flouncing off now it has been shown to you that this isn't applying the 2021 rules retrospectively!

Flouncing off, agreeing to disagree, are we in the playground? You are exhibiting troll tendencies now and clearly wanting forum argument brownie points, I’ll gift you as many as you require to make you feel better!

The finance companies defence is that they complied with all relevant legislation at the time.

As soon as commission disclosure became mandatory everyone fell into line. It will have been in the IDD, it should have been discussed verbally and I would think would be on the finance documents.

FOS appear to have said, so what, it’s been deemed an unfair set up, so it was therefore always an unfair set up, so we will side with the customer. They are looking back from 2007 to 2021.

The FOS ruling sent the FCA into a tail spin as they thought they had drawn a line under it and moved on and are aware the can of worms that had just been opened.

As of today who knows how it will pan out, the lawyers will be frantically working out where everyone stands.

But the current set up put in place by the FCA in 2021 is almost as bad.