Most UK residents obtain vehicles by using loans to finance their purchases. Dealerships act as middlemen to set up financial contracts between car buyers and lending institutions. Dealerships earn commissions as their payment for setting up car finance deals.

But recent scrutiny from the Financial Conduct Authority (FCA) and a growing number of consumer complaints have sparked a public debate: Do existing legal regulations ban car dealerships from obtaining commissions through vehicle financing deals?

The practice of commission isn't illegal but the methods behind its structuring and disclosure have attracted regulatory scrutiny. Any consumer who has financed a vehicle must understand legal requirements, ethical standards and possible compensation entitlements.

Is Earning Commission Illegal?

Earning a commission is not against the law. In many sectors, brokers and intermediaries are compensated for arranging services between consumers and providers. Problems occur when commissions remain undisclosed or when they generate conflicts of interest resulting in consumer harm.

Legal commissions differ from unfair and undisclosed ones through their levels of transparency and the intentions behind them. Legal commissions represent fees made through transparent disclosure without damaging the customer's contractual obligations. In undisclosed ones, sellers receive incentives to boost finance rates which leads to unfair commissions because customers encounter high costs without proper justification.

The issue with undisclosed commissions emerges from their violation of the obligation to deal fairly and honestly. Undisclosed commissions hidden in financial agreements prevent customers from making informed decisions which results in unfair transactions.

Dealerships earned commissions based on the interest rates they arranged for car finance deals. An increase in rate resulted in greater earnings for the dealer. This is known as a discretionary commission arrangement (DCA), and the FCA found it to be problematic because it incentivised dealers to increase the cost of borrowing without the buyer’s knowledge.

The FCA issued clear guidance stating that while commission is not illegal, it must be transparent. Consumers must be told upfront if a dealer is earning a commission and whether it affects the cost of the finance deal. Failing to do so can result in the deal being classified as mis-sold.

Discretionary Commission Arrangements (DCAs)

Dealerships could establish customer interest rates through discretionary commission arrangements but had to follow lender-defined parameters. The higher APR that dealerships negotiated resulted in bigger profits for them. The system resulted in widespread abuse which forced consumers to pay thousands of dollars more throughout their loan period because of these discretionary commissions.

In 2021, the FCA banned these practices altogether. The regulator pointed out that DCAs created a conflict of interest, leading consumers to face undue charges without understanding the costs involved. The objective of the ban was to create a transparent and fair car finance market.

Regulators decided to intervene, marking a crucial turning point in the UK car finance scandal. Thousands of drivers may have been overcharged without their knowledge, and now many are coming forward to make compensation claims.

How Commissions Inflated Customer Costs

When a dealer had discretion over the interest rate, their goal was often to maximise their own earnings. This meant that even customers with excellent credit scores were sometimes offered high APRs. The dealer wouldn’t necessarily explain why the rate was set as it was, nor disclose that a commission was involved.

The result? Consumers ended up paying significantly more than they would have if the commission had been fixed or disclosed. A minor change in APR from 5.9% to 9.9% can lead to thousands of pounds of extra costs in a four-year agreement.

The practice of DCAs offering higher interest rates caused consumers to lose trust and created barriers to effective market comparisons. The hidden costs are under review because thousands of PCP finance claims and HP refund applications have surfaced.

What Makes a Deal Eligible for Compensation

Customers with car finance agreements from 2007 to 2021 may be eligible for a refund if hidden commissions were included or their deal was mis-sold. The FCA has established guidelines to assess if borrowers qualify for refunds.

• Hidden Commissions: If the dealer earned a commission and failed to disclose it, your agreement may have been unfair. Lack of disclosure denies you the opportunity to assess whether the financial product was suitable or competitive. This breach of transparency is central to many filing PCP finance claims.
• No Disclosure at Point of Sale: Under consumer protection rules, you should have been informed if the finance deal included commission. If the commission was hidden or buried in small print, it could be deemed a mis-sale. Proper disclosure is vital for customers to give informed consent.
• Misleading Finance Advice: If the dealership gave you advice that was not in your best interest, for instance, pushing you towards a higher-rate finance option without explaining alternatives, you may have grounds for redress. Dealers frequently gain from misleading advice at the expense of consumers. This violates the FCA’s fair treatment standards and could make your agreement eligible for a claim.

These criteria form the foundation for many ongoing refund claims. Consumers who suspect they were misled should consider filing PCP finance claims with professional support or by contacting the Financial Ombudsman Service.

How to Use a Commission Refund Calculator

Tools such as the car finance commission claim calculator have been created to help consumers determine their potential refunds. These instruments allow you to easily obtain an indicative refund value with just a few basic inputs.

You’ll typically need:

• The make and model of your vehicle - Your vehicle's make and model enable identification of standard financing terms for that vehicle class which affects repayment expectations and commission structures.
• The year you purchased it - The purchase year of your agreement determines claim eligibility because it must fall within the FCA's designated timeframe from 2007 to 2021.
• The finance provider - The lender's identity matters because some lenders received more intense scrutiny during the UK car finance scandal which helps evaluate risk levels and usual commission practices.
• The length of your finance agreement - The duration of your finance agreement influences both the total interest amount and consequently the overall commission possible from a discretionary payment plan.
• The interest rate or monthly repayment amount - These figures are central to calculating how much you may have overpaid if the dealer inflated your rate to maximise commission.
  

Entering the data into the system enables the calculator to estimate your potential overpayment from hidden commissions. The calculator serves as an initial assessment tool for your claim but you must not rely on it as a full investigation replacement.

You should forward your information to a claims specialist to progress the investigation when indications of an overpayment appear. Reclaim247 enables consumers to submit correct and verified claims without experiencing much stress.

Conclusion

While it is not illegal for dealerships to earn commission on car finance, the way that commission is earned and disclosed has led to serious concerns. The FCA’s 2021 ban on discretionary commission arrangements was a necessary response to a widespread issue affecting hundreds of thousands of consumers.

You may be eligible for compensation if your finance agreement included undisclosed or unfair commission fees. Explore your available options by using reliable calculators or consulting with a professional. The issue goes beyond financial compensation because you are actually aiming to enforce industry accountability and restore your consumer rights.

To check your eligibility today, contact Reclaim247 or use our online tool to begin your journey toward financial redress.