FCA Car Finance Investigation: Discretionary Commission Ban

A Landmark Move Towards Transparency and Fair Practices

The UK's Financial Conduct Authority (FCA) has revolutionized the car finance market by banning the exploitative discretionary commission arrangements (DCAs) in January 2021. This change followed a multi-year review launched in 2017, unveiling widespread issues that cost borrowers hundreds to thousands of pounds in excess interest payments.

This guide delves into what DCAs were, why the FCA took action, how consumers have been impacted, and what steps you can take if you believe you were mis-sold a car finance agreement.

What Were Discretionary Commission Arrangements (DCAs)?

Before jumping into the details of the FCA’s ban, it’s important to understand what discretionary commission arrangements (DCAs) entailed.

A DCA was a system wherein brokers or dealerships determined the interest rates on car finance agreements. The higher the interest rate they imposed, the higher their commission reward. This structure created a clear conflict of interest:

• Brokers prioritized personal profit: They could increase rates from the lender’s base offer (e.g., moving from 5% to 7% APR) and pocket the difference as additional commission.
• Consumers paid the price: Buyers often remained unaware of these inflated rates and ended up spending more unnecessarily because the commission structure was not disclosed transparently.

How the FCA Exposed the Problem

The FCA’s investigation, spanning from 2017 to 2019, revealed that:

• DCAs were widespread across the UK car finance industry.
• Many consumers paid excessive interest rates without being informed about how these were calculated.
• There was a glaring lack of transparency and oversight by lenders overseeing their broker networks.

Major lenders, including Black Horse Finance (part of Lloyds Banking Group), Volkswagen Finance, and Santander, were highlighted during investigations. Companies like Black Horse have since pledged to review historic agreements and cooperate with potential consumer redress initiatives.

The Ban on DCAs: A Victory for Consumers

Effective 28 January 2021, the FCA prohibited lenders from structuring broker commissions based on interest rates. This seismic regulatory shift benefits consumers in the following ways:

• Lower borrowing costs: Without broker-driven rate inflation, interest rates now reflect actual credit risk and lender policies rather than profit motives.
• Transparency in agreements: Lenders must now clearly disclose how rates are determined and outline any commission structures.
• Enhanced consumer protection: This eliminates brokers’ ability to exploit information imbalances, encouraging fairer practices going forward.

How to Check if You Were Affected

If you secured car finance before January 2021, there is a chance you overpaid due to the exploitative DCA structure. You may be eligible for monetary compensation for financial losses

You can easily check if you were affected by using our free checker to see if you qualify. All you need to do is submit a few basic details and let the legal team do the rest.