Could Martin Lewis’ Advice on Motor Finance Commission Cost UK Consumers Billions?

Martin Lewis, the UK’s well-known financial adviser and consumer champion, has a strong track record of helping people save money, from energy bills to credit cards. Recently, however, his guidance on motor finance commission, particularly in focusing only on discretionary commission models, may unintentionally lead some consumers to overlook the broader issues in motor finance – issues which has the potential of costing UK consumers billions.

A brief summary of the blog below

This blog looks at the different ways car dealerships make money from arranging finance for cars. It focuses on how Martin Lewis, a popular money expert, only talks about one type of commission, called discretionary commissions. This focus could cause some consumers to miss out on other important issues related to different commission types.

The blog explains the various commission models used by dealerships, and how each can affect the final cost paid by consumers via their finance agreements. While Martin Lewis provides a useful template for complaints about discretionary commissions alone, Your Money Claim offers a comprehensive approach which targets all types of commissions.

This approach is especially relevant after the recent Court of Appeal decision in Hopcraft v Close Brothers, which emphasises the need for transparency in car financing.

In the end, the blog calls for better advice that covers all types of commissions, and how they should be fully disclosed and explained. This way, consumers can understand their financing options in a properly informed way.

Understanding Motor Finance Commission and Why It Matters

In motor finance, dealerships play an important role in connecting consumers with finance providers, often earning commission for each financing package they help to arrange. These commission structures can significantly impact loan costs but vary widely. Here are the primary models of motor finance commission:

• Discretionary Commission Arrangement Models

This model allowed dealerships some flexibility to increase interest rates within a certain range, allowing them to earn a higher commission when they raised interest rates on a consumers finance agreement proposal. This created an incentive to steer consumers towards higher rates, always without the knowledge of the consumer. Due to the inherent conflict of interest, the Financial Conduct Authority (FCA) banned these types of commission arrangements in 2021.

• Flat-Rate (non variable) Commission Models

With a flat-rate commission model, the dealership earns a fixed commission regardless of the interest rate. While this structure removes the incentive to raise interest rates indiscriminately, it doesn’t eliminate the profit motive. Dealerships often still have financial motivations to promote particular finance providers or loan types, with consumers regularly only being provided with one finance option which is not necessarily the cheapest interest rate available.

• Volume and Loyalty Bonus Commission Models

Some finance providers offer flat-rate commission models to dealerships, with added incentive bonuses based on the number of loans sold (volume bonuses) or as rewards for sustained partnerships (loyalty bonuses). These bonuses, again not disclosed to the consumer, often lead to only one finance option being provided to the consumer as dealerships may favour certain lenders for bonus incentives rather than the cheapest interest rate available to the consumer.

How Martin Lewis’ Template Will Limit Consumer Success

Martin Lewis’ guidance, including his online template for disputing motor finance agreements, focuses exclusively on discretionary commission arrangement models. His advice spotlights the risks of discretionary commissions, urging consumers to seek redress when dealerships mark up rates to increase commissions. However, by targeting only this one type of commission, Lewis’ advice will inadvertently limit the effectiveness of consumer complaints in cases involving other commission models.

• Narrow Focus on Discretionary Commissions: Concentrating solely on discretionary commissions has the real potential for consumers to miss out on challenging unfair costs linked to flat-rate, volume, or loyalty-based commissions. Cases show that even with flat-rate models, dealerships still prioritise profit over the consumer’s best interests, meaning the financing offered often isn’t the lowest interest rate available to the consumer.
• FCA Limitations on Flat and Bonus Commissions: While the FCA has imposed restrictions on discretionary commissions, other models, like flat-rate or volume-based commissions, haven’t been banned. Consumers using Lewis’ template may find it more challenging to make a case for compensation if their finance deal involved one of these other commission structures as the template makes no reference or challenge about these models.
• Increased Complexity in Redress Cases: Consumers relying on a template focused only on discretionary commissions may struggle to build a solid case if their agreement involves other commission models. Without covering the broader spectrum of commission types in a complaint, consumers may find it harder to argue for fair compensation or resolution.

Why Broader Consumer Education is Necessary

Martin Lewis’ guidance provides a valuable start but falls short in educating consumers on the full range of potential mis-selling in motor finance. Consumers should be aware that:

• Commission Models Are Often Layered: Dealerships may use a mix of commission types – discretionary, flat-rate, volume, and loyalty. Knowing which model (or combination) is in place is crucial to understanding the real cost of financing.
• Hidden Costs Can Persist Outside Discretionary Models: Even without the discretionary mark-up, dealerships often still profit from flat-rate and bonus commissions, meaning that interests can still conflict with what’s best for the consumer.
• Volume and Loyalty Bonuses May Skew Recommendations: Consumers may not realise they’re being directed towards specific lenders based on dealership bonuses rather than the lowest rates. As a result, consumers may end up paying more than necessary.

Your Money Claim’s Comprehensive Approach to All Commission Models

Your Money Claim stands out by targeting all types of commission models, providing a more comprehensive approach for consumers looking to challenge unfair costs in motor finance. Unlike some advice that focuses solely on discretionary commission models, Your Money Claim pursues cases involving flat-rate, volume, and loyalty bonuses as well.

Furthermore, Your Money Claim was already addressing these varied commission structures even before the Court of Appeal’s decision in Hopcraft v Close Brothers, anticipating the significance of the judgment. This proactive approach highlights the importance of challenging the broader scope of motor finance commissions and reflects an in-depth understanding of the industry’s practices.

The Court of Appeal decision supports the position of Your Money Claim and its approach to the technical arguments and challenges put to finance providers, and sets the legal precedent. This significantly increases the opportunity for compensation to be recovered for consumers adversely affected by any and all of the commission arrangements used by finance providers and dealerships.

A Call for Comprehensive Motor Finance Advice

It’s clear that broader consumer advice on motor finance is essential. Comprehensive guidance should:

• Educate on All Commission Models: Consumers need to be informed about the different types of commissions – discretionary, flat-rate, volume, and loyalty bonuses – and how each impacts financing.
• Encourage Detailed Comparisons: Consumers should be encouraged to compare personal loans directly from banks or credit unions against hire purchase and PCP options provided by dealerships.
• Advocate for Full Disclosure: The Court of Appeal judgment will now force finance agreements and documentation to disclose in a clear and prominent position all commission structures to help consumers make informed decisions.

Final Thoughts

While Martin Lewis’ focus on discretionary commission models is well-intended, but focusing solely on this one type could leave consumers vulnerable to the costs associated with other commission models. Comprehensive consumer education, broader transparency, and more inclusive advice on all types of motor finance commission are vital to fully protect consumers.

To protect UK consumers in the long term, guidance must consider the full landscape of motor finance commission models. This step could save people billions, reduce overcharging, and promote a fairer, more transparent motor finance market.

YOUR MONEY CLAIM