UK lenders paid car dealers cash upfront that may have led to costlier loans
UK lenders paid “advance commissions” to car dealers that may have encouraged them to push costlier loans on to consumers, legal filings linked to the motor finance scandal reveal.Court documents seen by the Guardian show that lenders, including Lloyds Banking Group, have paid commission to individual dealerships in lump sums upfront, which campaigners say total millions of pounds.The filings claim that the practice encouraged sales staff to funnel contracts to those specific loan providers, regardless of whether it resulted in more expensive payments for the buyer.These advance commission arrangements were not explicitly disclosed to borrowers and “created stark conflicts of interest” that stood to harm customers, the filings claim.Failing to sell enough loans to earn all the pre-paid commission resulted in negative consequences for the dealers, it is alleged, such as problems with profitability, cashflow or the relationship with the lender.
A county court hearing was told last year that Lloyds’ £15bn motor finance arm, Black Horse, was still paying advance commissions to some dealerships until at least April 2024.Advance commissions are still offered by Santander UK, according to its website, and were formerly offered by Barclays before it closed its motor finance division in 2019.The car loans scandal, which has been rumbling on for more than a year, is projected to cost lenders, including Santander UK, Close Brothers, Barclays and Lloyds, a collective £44bn, according to some analysts.That would nearly rival the payment protection insurance (PPI) saga, which cost banks £50bn.The concerns over advance commissions were raised in filings on behalf of the campaign group Consumer Voice, as part of its attempt to intervene in a pending supreme court case that will be key to determining compensation in the motor finance scandal.
While Consumer Voice’s attempt to present its evidence at the supreme court hearing was rejected earlier this week – as was a controversial intervention in the case by the chancellor, Rachel Reeves – the group’s co-founder, Alex Neill, said the use of advance commissions was “cause for concern”.Neill, a former executive at the consumer group Which?, said: “We have seen reports of car dealerships being paid nearly £15m in advance commissions.“Consumers are rightly angered by these and other practices that led to millions of hardworking people being overcharged.Car finance customers have also told us that they want firms held to account and that can only be done by bringing claims against lenders for the civil bribery they initiated.”The scandal ballooned in October when a court of appeal judgment vastly expanded a Financial Conduct Authority (FCA) investigation into motor finance commissions.
It determined that paying a secret commission to car dealers, who had arranged the loans without disclosing the sum and terms of that commission to borrowers, was unlawful.The two lenders involved in the case, Close Brothers and FirstRand, are seeking to overturn the ruling at the supreme court hearing, due to take place between 1 and 3 April.The matter of advance commissions is not mentioned in either of the cases heading to the supreme court, nor in an ongoing FCA investigation into a more narrow type of commission arrangement that was banned in 2021.Sharon Bowles, who is a member of the Lords financial services regulation committee, said advance commissions needed to be reviewed.Lady Bowles – who pushed the FCA’s chief executive, Nikhil Rathi, about the existence of advance commissions during a committee hearing last month – said: “This is surely a matter that should be the subject of more investigation and ruling somewhere, even if not explicitly in the supreme court case.
”Sign up to Business TodayGet set for the working day – we'll point you to all the business news and analysis you need every morningafter newsletter promotionShe said it was “an example of how a practice, over time, goes from bad to worse, seemingly without anyone there to exert a moral compass”.Santander UK has so far put aside £295m for potential payouts on the wider motor loan scandal.Lloyds was forced to put aside another £700m for the scandal on Thursday, taking the total amount earmarked for potential payouts to nearly £1.2bn.Lloyds executives admitted that “significant uncertainty remains around the final financial impact”.
The Financing and Leasing Association (FLA) lobby group, which represents car lenders, was asked whether it was aware, or had any concerns about advance commissions.An FLA spokesperson said: “We’re saying that if advance commission was a type of commission as alleged, then the FCA would recognise it as such, it would be included in its investigation and therefore covered by the supreme court case.”The FLA also claimed that the FCA had “examined motor finance commission arrangements in every detail over the last seven years and has not flagged this as an area of concern”.An FCA spokesperson said: “Motor finance customers must be given enough information to make informed decisions.That expectation is reflected in our rules for firms.
”The Guardian contacted a number of leading motor finance lenders for comment.A Santander UK spokesperson said: “Our car finance division has taken steps to require enhanced disclosure of commissions by dealers, following the court of appeal decision.We await the outcome of the supreme court appeal to understand its impacts for Santander UK and the wider car finance industry.”A spokesperson for FirstRand’s UK operations said advance commission arrangement were no longer offered by MotoNovo, but “historically were used in a negligible portion of credit broker relationships”.They added: “It was used as a cashflow management facility but did not provide any additional commission to the dealer/broker.
”Close Brothers, Barclays, Lloyds and BMW’s finance arm declined to comment.The National Franchised Dealers Association (NFDA), which represents car dealerships, also declined to comment.Ford’s finance arm did not respond to requests for comment.
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