Watchdog Bans Car Dealers From Earning Commission on Interest Rates

Mark Benson

Mark Benson

Money Savings Advice Millions on ‘Cliff Edge’ As Furlough Wraps Up

The UK's financial watchdog has banned car dealers from earning commission linked to the interest rate charged on car finance.

The Financial Conduct Authority (FCA) said that up and down the country, car dealers had been rewarded with extra commission from lenders by charging higher interest rates at the expense of customers.

According to the FCA investigation, the 'widespread' practise costs consumers around £165 million per year.

It announced on Tuesday that it had banned the practice, and its members must abandon the scheme by 28th January 2021 at the latest.

Car Dealers Selling Vehicles on Finance

Car dealers selling vehicles on finance currently have total control over how much interest is charged on the loan.

Under this arrangement, dealers who sell high-interest loans to unwitting customers stand to rake in a cut of the profits in commission paid by the loan company.

By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.

Said Christopher Woolard, the FCA's Interim Chief Executive

As many as half a million car owners in the UK may have taken out finance through a dealership operating under this conflict of interest.

The fact that some car dealers increase consumers' interest rates just so they themselves can benefit from a commission bump is outrageous. As motor finance options are on the up through schemes like contract purchases this is the time to make sure consumers are adequately protected against these conflicts of interests

Said Citizens Advice Scotland's financial health spokesperson, Myles Fitt.

Arbitrary Commission Models

The scheme works as lenders set maximum or minimum interest rates for dealerships, which broker loans with customer on behalf of the lender.

Salespeople are rewarded with commission on the interest of any loan taken out on their sales: the higher the interest rate, the more commission they earn.

In its preliminary investigation, the FCA estimated that customers were paying an average of £1,100 extra in interest on loans of £10,000 made under the scheme.

The new rules, which come into force in January next year, will also force changes to the way customers are told about sales commission.

The Watchdog Found

A team of mystery shoppers working for the watchdog found that, in dealerships across the UK, customers were being left in the dark about the dodgy commission deal- in breach of the FCA’s rules.

The new guidelines aim to make sure shoppers have more relevant information before signing off on a deal, including information about how the commission is earned.

Last year 9 out of 10 new cars were bought on finance, according to data from the Finance and Leasing Association.

In the same year, the total value of car finance loans taken out across the country stacked up to a whopping £38 billion.

Money Savings Advice Author Mark Benson

Mark Benson

Mark has been writing professionally for over ten years for the financial sector. Having started in the financial world as a stock-broker in central London and then moving to equities trader Mark is one of our senior financial writers who has a vast knowledge of multiple financial sectors.

How does Money Savings Advice work

Money Savings Advice is an independent editorial company providing detailed information about numerous financial niches with the aim of helping consumers make informed financial decisions. We aim to provide hints, tips and techniques to help you make your money work for you. However, we are not perfect, and we accept no liability if anything we write about goes wrong.

  • The information detailed on Money Savings Advice does not constitute financial advice. It is always advised to do your own research to make sure the product/solution we write about fits your circumstances.
  • The aim of Money Savings Advice is to match you with a financial advisor, claims management company or another financial service company that can help you with your financial needs.
  • Money Savings Advice aim to provide the most up to date and accurate information about all financial subjects, and as such we sometimes link to other websites, but we (Money Savings Advice) can’t be responsible for their content.
  • Money Savings Advice is independent and not linked to any financial company.


Who are Money Savings Advice

Money Savings Advice is a trading name of RMM Digital Publishing Ltd. Registered trading address, First Floor, 85 Great Portland Street, London, W1W 7LT. Trading in England and Wales, company number 11550143 with data protection number ZA747669.

Back to top