The Financial Ombudsman Service (FOS) cited approximately 20,000 car finance commission complaints as consumers realized that they were charged with commissions in their car finance agreements they knew nothing about.

This concern about hidden commissions that dealers and brokers received in every car finance agreement raised questions about transparency and fairness in car finance industry practices.

“We have heard from more than 20,000 people with concerns that they were charged too much for their finance,” said James Dipple-Johnstone, FOS Deputy Chief Ombudsman. Further, he added, “When people take out a car loan, it’s imperative they are treated fairly and the financial implications are totally transparent.”

As of January 2024, the FOS published their first final ruling on representative of complaints that they received. This decision can serve as precedents to the other complaints that they are currently investigating.

A significant increase in the car finance commission complaints

From the 3rd quarter of 2023 to the 1st quarter of 2024, the FOS received approximately 560% increase in car finance commission complaints.

This significant increase in car finance commission complaints has been observed since the 4th quarter of 2021.

As an independent body, the FOS hopes to provide the most impartial, fair, and just resolution to these complaints. “Our role is to ensure that everyone with a valid complaint gets fair compensation. And – no matter what the outcome of a complaint – we want to provide clear, reasoned answers at the earliest opportunity,” the FOS said.

As of the initial investigations of the FOS, three car finance commission cases were granted permission to go to the Court of Appeal in March 2024. The ruling of the Court of Appeal on these cases could potentially influence how the law relating to secret and half-disclosed commissions might be used to motor finance commission payments.

The cases which were brought before the Court of Appeals were those wherein both the consumer and the financial service provider did not come into agreement after the intervention of the FOS.

In April 2024, the FOS released an update saying, “Clydesdale Financial Services Limited – trading as Barclays Partner Finance – started judicial review proceedings in relation to one of our decisions. The judicial review hearings have not yet taken place.”

Further they added, “We recognise that both the judicial review and the Court of Appeal’s decisions could have an impact on our approach to complaints that include similar issues.”

Common complaints FOS received

Before the FOS acts on the complaints of the consumers, it is the responsibility of the consumer to contact their car finance service provider to settle whatever disputes they have in terms of their car finance agreement.

According to the FOS, the consumers complain because:

1. the car finance agreement was unfair

The consumers feel that the car finance agreement was unfair because of the commission structure applied in the agreement. Most often than not, the consumers were at a disadvantage because they pay higher rates instead of what they actually need to pay just to cover the commissions of the broker or the dealer.

1. the commission was not properly disclosed to the consumer

Many consumers complain that they were not adequately informed about the commission the broker or the dealer would receive after closing the deal. This makes the consumers feel misled and unsatisfied, considering the impact of the commission on the interest rates that they need to pay.

One prime example is the case of Marcus Johnson, who bought a car from a car dealership Trade Centre Wales for £4,600 which also arranged finance with Cardiff-based MotoNovo Finance.

According to Mr. Johnson, he was not informed that the dealership received a commission of £1,650n which is 25% of the total amount he loaned.

As Kevin Durkan from HD Law, the representative of Marcus Johnson argued, “There was only a vague reference to this arrangement in the paperwork which the court of appeal found was buried."

The role of the FOS starts when the consumers were not satisfied by the resolution provided by their car finance service provider, or even worse, their complaints were ignored or denied by their car finance service provider.

In these cases, the FOS observed that consumers complained to them because:

1. they were unaware that the broker or the dealer would receive commission from the lender after arranging the car finance agreement;
2. they believe that the commission structure applied by the lender in their car finance agreement was unfair;
3. the commission arrangement between the broker and the lender influenced the advice that their credit broker provided them, hence lacking in impartiality;
4. they were not given the best interest rate available for the vehicle they purchased.

Looking ahead with the FOS

While consumers continue to lodge their complaints, the FOS asserted that they will continue to process the complaints to ensure that they will have sufficient information to support their ruling.

“We will continue to accept and investigate complaints as far as we can,” the FOS said.

As the FOS commits to continuous investigation, they also hope to provide fair and just resolutions to both consumers and car finance service providers.

On the other hand, while consumers are assured of investigation, the FOS still awaits for the court decisions that may influence their future decisions.

“The Court of Appeal’s decision is expected to consider how the law relating to secret and half-disclosed commission might apply to motor finance commission payments," they said.

Further, they added that, "We’re unlikely to be able to issue final decisions on affected cases for some time."

This highlights the potential impact of the Court of Appeal rulings to representative cases that FOS handles.

Moreover, the FOS is working on collaborating with the Financial Conduct Authority (FCA). While the FCA is conducting its review of the discretionary commission arrangements in car finance, the FOS is working to coordinate with them. “The FCA has committed to provide further information about next steps by September 24, 2024,” according to the FOS.

With the review being conducted by the FCA, the requirements for the financial firms to issue financial responses have been put on hold, with further guidance expected by September 24, 2024. The FOS aligns its actions with the FCA’s timeline, to ensure its decisions and processes remain compatible with new guidance or regulations.

Furthermore, the FOS will continue to issue provisional assessments and final decisions on unaffected cases. According to them, they will continue to process the complaints to identify whether they are likely to be affected by court proceedings and issue investigator provisional assessments and ombudsman final decisions on cases that are not impacted.

This step ensures that cases not directly affected by the pending court outcomes can still be processed and resolved, providing some consumers timely resolutions.

Finally, the FOS urges financial firms to investigate and respond to complaints diligently. This ensures that the process moves forward on the firms' side and that consumer concerns are addressed as quickly as possible despite legal delays.

As they mentioned, “We’re determined to progress consumers’ complaints as far as we can, and firms should continue to investigate and respond to complaints promptly."

Implications of the investigation to consumers

While the investigation into the rising number of car finance commission complaints is still ongoing, consumers are expected to benefit once the rulings are made.

This investigation could potentially:

1. Increase consumers’ awareness of their rights and privileges particularly when entering into a car finance agreement;
2. provide fair and just compensation for all their valid complaints of the consumers;
3. improve the commission structure in favor of the consumers;
4. increase scrutiny of the financial agreements, particularly the car finance agreements.

What car finance service providers should expect?

The FOS advocates for impartiality and fairness for both consumer and finance service providers. However, it is also the goal of the FOS to put forward consumer’s rights and privileges in accordance with the law. Hence this investigation could potentially:

1. require car finance service providers to comply with stricter regulations and policies;
2. pose risks and challenges among the car finance service providers, especially if the court rules in favour of consumers;
3. impact the reputation of the car finance service providers as the number of complaints continues to rise.

In conclusion, the pending complaints handled by the FOS are pivotal in consumer finance. As these rulings are still pending, consumers and financial firms are reminded of fairness and transparency in financial arrangements. The outcome of all these complaints, the decisions of the Court of Appeal, and the findings of the FCA will most likely shape future practices in the car finance industry, setting standards that prioritise clear communication and equitable agreements.