‘Every penny counts’, they say. I covered the most cost-efficient way to buy a car in this column a couple of months back, and it’s quite apt that the appeal courts have just sided with consumers over the secret car loan commissions, a ruling which may rock some financial institutions further than some may think.
A few months, I wrote a column about fraud in which I explained how we are sometimes ‘hypnotised’ into problems which are often obvious, only after the event.
You are in a car show room. You’ve driven the car. You bathe in its new car aroma like Cleopatra. Everyone will think you are cool when you buy it and drive it home and the windscreen is clean. You work out if you can afford it (buying it monthly) and you are teetering on the end of that deal, when your partner does the right thing and says “shall we think about it?”. You look back at him like he has just finished your food in a restaurant when you nipped to the loo.
That’s where the amygdala hijack comes in and your emotions over-power logic. Most dreadful decisions are made at that point. The Bank of Ireland have a “Stop, Think, Check” slogan for their fraud awareness campaign. This however applies to any decision just as it would here. I encourage you to read my previous column on how to buy a car efficiently. You won’t go wrong after that.
Institutions like Santander, Close Brothers, Motonovo, Lloyds, Honda Finance Europe and Barclays have large exposures to this ruling. The Financial Conduct Authority’s (FCA) temporary pause on final responses at the end of 2023, temporarily suspends the requirement for financial firms to issue final responses to customer complaints about Discretionary Commission Arrangements (DCAs) in motor finance. The FCA officially banned discretionary commission arrangements in motor finance on January 28 2021. Close Brothers (who are considered to be most exposed in relative terms) share price has fallen 85.8% since its peak in 2021. So, your £10,000 investment in its share, is worth less than £1,500 now.
When I sat down to write this column after the ruling, Lloyds had fallen 8%, Santander 2%, Barclays 5% and Close Brothers at 35%.
The real issue is whether this ruling opens the scope of the legal aspect of this judgment, in that any model within the businesses where the commission received is the wrong side of this judgment (i.e. not clear) could be caught.
The court ruled that dealers were acting as fiduciaries (an adviser or guardian) and that they owed a ‘disinterested duty’ to disclose commissions which was not met at all times by some parties. A “disinterested duty” means that a person (like a car dealer) has a legal obligation to act in the best interest of someone else (the buyer) without letting their own interests get in the way.
Some dealers were allowed to adjust the interest rate for a customer, so they received a higher commission. As buyers weren’t aware of this (see amygdala hijack above) their decision making was compromised.
The cases affected, run from 2007 to January 2021, affecting millions of customers, and the compensation could be as high as £16 billion (which sounds a lot!).
Compensation will be calculated as the difference between a fair rate and the rate charged plus any potential fees or penalties impacted by that inflated rate. In certain circumstances where the contract is deemed misleading or managed improperly, the customer may have the loan voided either by cancelling the loan, writing off balances, or refunding payments.
To claim, don’t answer those annoying claim people. Don’t. They will charge you for something the FCA will be ensuring you receive anyhow, and they are annoying.
Go straight to the lender and file your complaint: “I took out this loan and think I may have been disadvantaged by discretionary commissions”. Give the rest of your data for the loan and send it date stamped and recorded if necessary. They will be taking time to get back to you as they have millions as above, but at least your complaint is in the system, and you won’t be time barred.
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial question, call 028 6863 2692 or email info@wwfp.net
