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How Britain’s car finance scandal unfolded (and why dealers are furious)

car finance
car finance

The Vauxhall Zafira was one of the most reliable family cars ever to roll off the production line, so driving one home after paying just a fraction of the price must have felt like a steal.

That’s what Lisa King thought when she bought a new top-of-the-range Zafira in 2012. She paid a little under £14,000 up front and financed £12,000 over five years in repayments of £279 a month. “It was a lot cheaper than the book price,” she said.

The catch? A whopping 12.7pc interest rate, at a time when the cost of borrowing was near record lows.

“We didn’t think anything of it,” despite an “excellent” credit rating at the time, she said.

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“When the salesman said we wouldn’t be able to match that price elsewhere, we said ‘okay’.”

Six years later, following a notice from the City watchdog in 2019, Mrs King, along with thousands of other drivers, discovered that their finance deals may not have been sold “subject to status”, which would have set the interest based on a credit rating.

Instead, it was at the whim of the dealership in roughly 40pc of cases, according to the Financial Conduct Authority (FCA). What’s worse, car dealers, who act as brokers on behalf of lenders, in Mrs King’s case Black Horse (a division of Lloyds Banking Group), were incentivised to secure higher rates with extra cash.

Lisa King
Lisa King was surprised to discover that interest on her car finance deal was subject to the whim of the dealership rather than her credit rating - Daniel Jones

The so-called discretionary commission arrangements were everyday practice at dealerships – for decades. They played a role in millions of loan agreements and potentially saw consumers collectively pay billions of pounds over the odds for cars.

The commissions were banned by the FCA in 2021 but it was initially implied the ban would only cover new loans, as opposed to historic claims.

But a landmark case in January, where the Financial Ombudsman ruled in favour of a case against Black Horse, has paved the way for thousands of new claims going back to 2007 to be heard while the FCA investigates whether to approve mass payouts, with a decision due in September. It found drivers paying up to £1,100 over the odds on a £10,000, four-year finance deal.

Many are already describing the unfolding situation as the “next PPI” and claims management companies will likely be smelling blood as major banks brace for a wave of payouts, including Lloyds which this week said it had reserved £450m against possible compensation.

The total sum banks could be on the hook for is between £6bn and £16bn, according to estimates from RBC Capital, which will worry anyone with a stake in any one of the major FTSE 100 investment banks that could be implicated.

‘This has been known about for years’

But car finance industry voices have argued that while, on paper, the ability for dealerships to set interest rates themselves looks bad, in practice it enabled better, more flexible deals for consumers in the vast majority of cases.

Adrian Dally, of the Finance and Leasing Association (FLA), said: “Ultimately, being blunt, the scale of this has been misrepresented.”

“What the FCA is doing has been misrepresented. Where motor finance providers, our members, have rejected most of those because we consider what happened was within the rules.

“There’s a perception that what happened was lenders allowed dealers to raise interest rates to earn more commission. No that isn’t how it worked at all, what goes up can come down. They had discretion to lower the rate.”

“Ultimately dealers wanted the [discretionary commissions] so they could bring down the rate in order to match what a consumer was offered elsewhere. The consumers benefited more than they lost from this discretion.”

Mr Dally said that discretionary commissions were “something we have been aware of for a long time. It’s not been secret, it’s been out there.”

‘Profit isn’t a dirty word’

It is a view shared by Dominic Threlfall, former managing director of Pebley Beach Group, a car dealership headquartered in Swindon, Wiltshire, who said discretionary commissions were a vital tool to stay profitable during his more than 30 years in business.

He said: “Did it happen? Yes. We did increase interest rates, but it wasn’t an insult. It was part of a package. When people buy a car they buy a package and the dealership will stack the package up.

“Each customer is different and that’s what [we] tried to do, to make a deal that fits the customer.

“We have customers coming in who may not have had 10pc deposits, therefore we have to reduce their car prices down a bit. [So] what you would do is reduce the car price down, you might put the interest rate up a little bit to compensate for that.

“Because [dealerships] were earning more on commission that meant they could reduce the price of the car, or reduce the price of the trade-in car.”

“Just by putting the interest rate up a little bit the customer has walked out with a much better package,” he said, arguing that the consumer may have to spend less cash up front.

“It probably cost the dealership a little bit of money to sell it that way”, he said. “Companies should not be crucified for that, it’s a package to buy a car. We’re not a nanny state, people are making an informed decision that they want to buy that car.

“I laugh almost at what is going on,” he said, adding: “It is almost as if profit is a dirty word.”

Despite the motor industry’s protestations that the FCA’s intervention is a storm in a teacup, there are plenty who think car finance could result in large sums being returned to hundreds of thousands of customers.

Money Saving Expert founder Martin Lewis is among them. He said the watchdog’s investigation was “huge” and could lead to “PPI-scale” payouts. If you think you might have been mis-sold read our guide before putting in a claim.

A spokesman for Lloyds Bank said: “We are currently reviewing the recent FOS decision and will support the FCA with the upcoming industry review.”

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