The Financial Conduct Authority (FCA) has announced stricter new car finance rules for finance companies and car dealers, which it says will save car buyers of the UK an estimated £165 million each year.
More than 90% of all private new car sales are financed through the dealership, with the vast majority of those on personal contract purchase (PCP) finance. A rapidly-growing percentage of used car sales are now also financed through dealerships on a similar basis, with the car finance market now worth about £46 billion a year and still growing despite sales slowdowns.
The planned new car finance rules will prevent car dealers from charging customers high interest rates and then pocketing extra commission for doing so. Instead, they will be paid a flat commission for providing finance, regardless of the interest rate that the customer pays.
In addition, there will be tougher rules to ensure that car dealers are correctly disclosing to customers when they are earning commission on finance products.
The new rules were announced yesterday and are out for consultation until January. Assuming there are no significant changes, they should come into effect later in 2020.
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Holding the car industry to account
These new car finance rules are the result of the FCA’s two-year investigation into the car finance market. During undercover investigations of thousands of car dealerships, the FCA found that the vast majority of dealers were not correctly disclosing to customers how they earn commissions from selling finance.
It also found that the way car dealers set interest rates on finance deals was unfair to customers. In many cases, dealers are paid commission on how much interest they charge – encouraging them to set higher interest rates for customers to maximise their commission earnings.
Under the new rules, dealers will still be paid commission for selling finance, but it will no longer be linked to the interest rate paid by the customer. Inevitably this will lead to dealers being more willing to offer lower rates, which will mean lower monthly payments for car buyers.
The changes are likely to affect used car finance to a greater degree than new car finance, as car manufacturers tend to offer low-rate deals packaged up with deposit contribution offers on many of their cars anyway. The manufacturers’ in-house finance companies also usually charge lower interest rates on new cars than used cars as its obviously in their interest to sell new cars rather than selling cars they already built three years ago.
Industry reaction to the new car finance rules
The move has been broadly welcomed by consumer rights champions, as well as the finance industry’s representative body, the Finance and Leasing Association (FLA).
Adrian Dally, head of motor finance at the FLA, said: “Today’s announcement is good news for the industry and consumers, as it delivers clear rules and a consistent approach to commissions.” He also pointed out that many lenders have already changed their commission schemes in line with the models that the FCA is proposing.
Martin Hill, managing director of automotive financial software firm DealTrak, said: “It’s clear that the Regulator’s investigations have been very considered and reflective – and it will mean a shake-up of what has been considered the norm for so long.
“It’s looking increasingly likely that the FCA is leaning towards a move to approaches such as a flat fee structure, similar to the mortgage and pensions industry.”
There has, however, been concern that if dealers are being deprived of significant income from tougher car finance rules and regulations, they will simply increase prices elsewhere.
Alex Buttle, director of car selling comparison website Motorway, said: “The FCA’s decision to crack down on how dealers make commission from car finance is timely, but the worry is that some dealers will simply move customer costs onto another part of the transaction.”
In other words, look out for increases in the prices of service plans, scratch & dent cover, GAP insurance and any other extras, plus increasing aggressiveness from salespeople to get you to add them on to your next car. In any case, you can pretty much all of those things much cheaper from third-party providers so shop around!