A Guide to Understanding Discretionary Commission Arrangement in Car Finance

Over the past few years, the United Kingdom auto finance sector has been seeing significant improvements, particularly about its openness and fairness to customers. One of these developments is banning discretionary commission arrangements (DCAs), a common practice in the market for decades. This came after consumers lodged thousands of PCP finance claims and other mis-selling reports, triggering questions about the ethics of DCAs and their impact on drivers. 

Here, we’ll cover the concept of DCAs, how it affected clients and market players, and how authorities are addressing the issue. If you want to learn more about hidden commissions and whether you’re eligible for redress, keep reading. 

What is a discretionary commission arrangement?

In the motor finance segment, automobile brokers and dealers typically receive remuneration through interest, which is charged on a client’s loan under the discretionary commission arrangement or DCA. Brokers were given the authority to determine the interest rate within a specific range, which is commonly determined by the borrower’s risk profile. To put it simply, brokers receive larger commissions with higher interest rates. 

The Financial Conduct Authority (FCA) concluded that this practice immediately benefits brokers, motivating them to overcharge clients, contrary to their fiduciary duties. In the motor lending industry, brokers have the responsibility to put forward offers that best benefit their customers. 

However, the FCA found that many customers are unaware of such arrangements between dealers and lenders, depriving them of their ability to make informed decisions and making them vulnerable to overcharging. This shows that DCAs foster a conflict of interest, prompting the agency to start regulatory investigations. 

How much will I get back from the discretionary commission agreement?

As authorities find out how customers have been overpaying for their car loans, drivers like you may wonder how much you will be able to get in compensation. You should know that the specifics of your auto loan deal are one of the many variables that could affect how much you could get from car finance claims. 

Estimates show that clients may have overpaid £1,100 in interest on a £10,000 four-year loan that included a DCA. So, general assessments say that eligible consumers can anticipate getting over £1,000. However, car finance compensation awards can occasionally be greater, especially with the help of claims management services. The higher end of the spectrum can reach £1,500 and £1,600.

Wondering if you are eligible for a payout? You may be eligible for a DCA claim if you signed a motor finance contract between April 6, 2007 and January 28, 2021. According to the FCA’s new rules, you may still file a complaint with the FOS until July 29, 2026, if you obtain a final response from the lender by April 29, 2025.

When were discretionary commission arrangements banned by FCA?

The FCA banned discretionary commission arrangements on January 28, 2021. This ban is intended to stop brokers and dealers from unfairly making money by raising interest rates without informing customers. The agency sought to eliminate DCAs to create a more transparent auto lending market where customers could obtain reasonable rates without worrying about inflated rates and charges. 

The regulator’s attention was panned toward discretionary commission arrangement practices in 2017 when it started to probe the motor lending sector. According to its March 2019 final findings, the agency found that the discretionary commission arrangement model was being used extensively across the industry, concluding that a significant portion of firms have been failing to follow FCA guidelines and regulations. 

After the ban, the FCA estimated that the removal of exorbitant rates that brokers used to impose could help save consumers an estimated £165 million per year. So far, the decision has led to lower rates for consumers and is expected to improve the market. 

Which companies used discretionary arrangements?

Many well-known auto loan companies, including big players like Lloyds Banking Group’s Black Horse, MotoNovo, Santander, Close Brothers, and BMW, used DCAs before the FCA’s prohibition. 

Perhaps one of the most prominent participants in DCAs was Lloyds via its motor finance firm. In fact, sources say that the firm is the “most exposed” among all UK banks because of its operations under Black Horse. Money Saving Expert’s (MSE) car finance complaints tool received over 1 million letters within a month after its launch, 16.1% of which were against Black Horse including Jaguar, Land Rover, and Suzuki. 

To prepare for the potential payouts, the firm has set aside £450 million, but experts say that the actual cost may fall between £2.5 to 3.9 billion. 

Santander also anticipates compensation costs to reach £1.1 billion, preparing £1.4 billion to address complaints. Of the number of complaints received by the MSE tool, 8.2% have been attributed to Santander including Hyundai, Kia, and Volvo. 

Another significant figure in this scandal is MotoNovo, which has previously been named in a landmark DCA case. Money Saving Expert, founded by financial journalist Martin Lewis, showed that 6.8%  of the reports were against MotoNovo.

Close Brothers is another firm that was involved in a similar case. Analysts predict that Close Brothers might lose £252 million, getting 2.4% of the MSE tool’s first-month data.

Barclays faces significant costs, potentially reaching £357 million. The aforementioned firm and BMW’s financial trading arm, Alphera, both garnered 3.1% of MSE’s data. A separate entry for BMW Financial Services was present with a 7.4% share of the complaints. 

Other lenders and associated manufacturers named in the reports include Volkswagen Financial Services, Stellantis Financial Services, Mobilize, and Ford Credit Europe, among others.  

What is the discretionary arrangement's average payout by the lender?

If you are eligible for a DCA claim, you might get a minimum of £1,000. A report by LawPLus Solicitors mentioned that its clients have received £1,500 to £1,600 in payouts.

The precise refund amount may vary depending on the conditions of the contract and the duration of the inflated rate. If you suspect that your auto loan agreement contained a DCA, your next step would be to file a complaint. 

The process typically starts by verifying the existence of a DCA, and then filing a complaint with your financial provider. You have the option to take your complaint to the Financial Ombudsman Service (FOS) if you are not satisfied with the response.

Martin Lewis’ take on discretionary commission arrangements

Lewis, a consumer rights advocate, has been speaking up about DCAs amidst the ongoing auto loan scandal. He has been directing consumers’ attention to potential overcharging due to discretionary commission arrangement practices. He agrees with experts who estimate that the motor industry could be seeing a billion-pound loss in compensation, with consumers getting a payout of over £1,000.

To help drivers recover the excess amounts they paid, he encourages them to carefully review their agreements and start a claim as soon as possible. Those who do not know where to start can use the MSE tool, which seeks to help consumers reclaim their car finance overcharges. 

Given the anticipated changes brought by the FCA’s investigation, Lewis believes that the probe may result in significant ramifications. Drivers can expect a pro-consumer stance from authorities, as well as the establishment of standards for financial products. He also hopes that the FCA will take the necessary steps to ensure that compensation will be assessed fairly with minimal delays.

Discretionary commission arrangement update

The FCA’s investigations are still ongoing, with an update scheduled for May 2025. While findings by the agency are expected to have a huge impact on motor lending policies, another major development recently happened courtesy of the Court of Appeal. Regarding the combined cases of Johnson vs Firstrand, Wrench vs Firstrant, and Hopcraft vs Close Brothers, the court ruled that dealers failed to uphold their fiduciary duty and that offending parties must be held accountable for mis-sold car finance.

The Takeaway

With the substantial changes in the motor lending landscape thanks to moves by the FCA and Court of Appeal, consumers can take on a more optimistic view of their existing auto loans, particularly those who suspect being victims of mis-selling by dealers. Further investigation may be required, but eligible drivers may be able to recoup some money that they overpaid.