Before January 2021, some lenders allowed brokers (the individual that arranges the loan, for instance, a automotive dealer) to regulate the rates of interest they offered customers for automotive finance. Typically, the upper the rate of interest, the more commission the broker received. This was referred to as a discretionary commission arrangement.
The Financial Conduct Authority says discretionary commission arrangements created an incentive for brokers to extend how much people were charged for his or her automotive loan. It banned this practice in 2021. But there has since been a high variety of complaints from customers about how much they were charged before the ban. So now the FCA is assessing the extent of the issue.
Two recent automotive loan misselling cases heard by the Financial Ombudsman Service (FOS) against Black Horse Motor Finance and Barclays Partner Finance have been mentioned by the FCA as particularly influencing its decision to dive deeper into this issue.
In each, the financial ombudsman deemed the shoppers had not been treated fairly because there was a discretionary commission agreement between the finance company and the dealer/broker and the client was not aware of this.
In neither instance was FOS particularly critical of the dealer/broker, and it didn’t name them in its rulings.
Mrs Y vs Black Horse
In 2016, Mrs Y sought to purchase a £7,619 used automotive from a dealership, a regulated broker, which introduced her to Black Horse which arranged a hire purchase agreement for the total amount at 10.5% APR. The overall charge for credit was £2,096.47.
The ‘flat rate of interest’ was 5.5%. The FOS report states Black Horse was prepared to lend to Mrs Y at a flat rate of interest of between 2.49% and 5.5% with any amount charged above 2.49% going to the broker in commission. The broker chosen the very best flat rate of interest inside the permitted range, of 5.5%.
In total Black Horse paid the broker £1,299.05 as a direct consequence of arranging the hire-purchase agreement, consisting of £1,148.67 of commission under a DCA and £152.38 ‘support payment’ to the dealers head office, equivalent of two% of the credit amount.
The ombudsman said although the dealership disclosed that lenders ‘may’ pay it fees for introductions, it didn’t disclose that Black Horse ‘would’ pay it nor provide any further information on the commission model in use, which the ombudsman found meant it did not appropriately disclose the existence of commission and it did not manage the conflict between its interests and the interests of Mrs Y (Principles 7 and eight)
“If Mrs Y had been told in regards to the structure of the commission arrangements (and particularly the discretionary commission arrangement), she wouldn’t have entered the hire-purchase agreement on the terms she did. Mrs Y wouldn’t have been prepared to pay the Broker such a major amount for introducing it to Black Horse (which was the effect of the discretionary commission arrangement and the direct link to her payments), particularly on condition that the broker already stood to receive £152.38 under the support payment,” said the ombudsman.
It said: “Black Horse’s commission model not only delegated the ability to set the speed to the broker, nevertheless it also created an inherent conflict between the interests of Mrs Y and the interests of the broker by linking the quantity of commission the broker would receive to the interest Mrs Y would pay on her agreement, thereby incentivising the broker not to scale back the rate of interest. This meant that the upper Mrs Y’s rate of interest was set, as much as a maximum of 5.5%, the more commission the broker would receive.”
The ombudsman ordered Black Horse to compensate Mrs Y by paying her the difference between the payments she made on the 5.5% flat rate of interest and the payments she would have made were the finance arrangement arrange at its lowest – and 0 discretionary commission paying – rate of two.49% flat rate, plus interest on each overpayment at 8% per 12 months.
Miss L vs Barclays Partner Finance
In November 2018 Miss L took out a conditional sale agreement with Barclays Partner Finance at a dealership to purchase a £19,133 automotive, borrowing £13,333 at a 4.67% flat rate of interest and eight.9% APR. The overall charge for credit was £3,113, entirely made up of interest.
The dealership, as broker, received £1,326.60 in discretionary commission from Barclays PF, plus a second payment of £266.66, or 2% of the credit amount, was paid by Barclays PF to the dealer group’s head office.
The ombudsman heard that Barclays PF was prepared to lend to Miss L at a flat rate of interest of between 2.68% and 15.25%, with any amount charged above the two.68% minimum going to the broker as commission.
A flat rate of interest of 4.67% was chosen by the dealership/broker, and even though it disclosed that lenders typically paid it a fee for introductions it didn’t disclose that Barclays would pay it nor provide any information in regards to the context by which it might be paid commission.
The ombudsman identified that Barclays’ agreement with the broker provided for “differential commission rates” and as such, Barclays PF must have entered into the arrangement where the payments were justified by extra work. “The discretionary commission arranegement on this case was not linked to the quantity of labor carried on by the broker,” said the ombudsman’s ruling.
“By introducing and operating the discretionary commission arrangement with the Broker on the terms it did, Barclays PF acted contrary to the guidance at CONC 4.5.2G and did not have due regard to Miss L’s interests and treat her fairly as required by Principle 6,” it added.
It said that Miss L, had she known in regards to the discretionary commission arrangements, wouldn’t have been prepared to pay the dealer such a major amount for the introduction to Barclays PF particuolarly that the dealer would already earn the £266 payment to move office.
To handle this “unfair relationship”, the ombudsman has ordered Barclays PF to pay Miss L the difference between the payments she made to the agreement on the flat rate of interest set by the broker and the payments she would have paid if the agreement had been arrange at the bottom, zero discretionary commission paying, flat rate of interest of two.68%. As well as, Barclays PF was told to scale back the remaining monthly payments to reflect what they might have been had her contract been at 2.68% flat rate, not 4.67%.
The total rulings of each cases could be downloaded here and here.
This Article First Appeared At www.am-online.com
