In UK motor finance loans, ‘commission’ refers to payments made by lenders to car dealers or brokers for arranging car loans. The controversy stems from commission payments being made in secret – without the customer’s knowledge and consent. Or, the commission arrangement meant that the customer had a much more expensive car loan. There are two main types of commission arrangement, which have created two types of compensation claim you need to know about:
A. Discretionary commission
B. Undisclosed commission
The regulator, the Financial Conduct Authority (FCA) is looking into these commission arrangements, effectively placing a giant pause on claims for compensation for discretionary, or undisclosed, commission. This pause will be in place until at least December 2025. That said, customers are able to start a claim for compensation now…
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A. Discretionary Commission
In brief:
Banned in 2021, this was where the car dealership would have the power (or discretion) to alter the interest rate on the customer’s car loan, due to a backroom deal between the car dealership and the lender. Usually, the more the car dealer increased the interest rate on the loan, the more commission they would earn for themselves, at the customer’s expense.
The court case:
R (Clydesdale Financial Services Ltd) v Financial Ombudsman Service Ltd [2024] EWHC 3237 (Admin)[1]
Clydesdale (trading as Barclays Partner Finance) took the Financial Ombudsman Service (FOS) to court about a decision one of its Ombudsman made. The Ombudsman had ruled in favour of the customer in regards to a complaint about discretionary commission. The Ombudsman had ruled that Barclays Partner Finance needed to compensate the customer for the unfair discretionary commission arrangement. Clydesdale lost this court case – as the Judge sided with FOS. This case is seen by many as an endorsement of FOS’s approach to complaints about discretionary commission, indicating that FOS will continue to uphold such cases in the customer’s favour, where the evidence supports such a decision.
Case study:
Ms Lewis
In November 2018, Ms Lewis visited an Arnold Clark showroom in Liverpool to buy a car. Like many buyers, she needed a loan to make the purchase. Arnold Clark introduced her to Barclays Partner Finance (trading as Clydesdale Financial Services), and Ms Lewis entered into a finance agreement to borrow the money she needed for the car.
This finance agreement wasn’t as simple as it seemed. Behind the scenes, Arnold Clark, acting as a broker, set the interest rate on Ms Lewis’s loan. The interest rate wasn’t fixed by Barclays—it was determined by Arnold Clark within a range Barclays allowed. The higher the interest rate Arnold Clark chose, the more commission they earned from Barclays. In Ms Lewis’s case, Arnold Clark selected an interest rate of 4.67% (equivalent to 8.9% APR), earning themselves £1,326.60 in commission.
Example lenders:
Lenders known to have used discretionary commission:
Barclays Partner Finance, BMW Financial Services, Alphera, Blackhorse, Santander Consumer Finance, Mercedes Benz Financial Services, and others…
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B. Undisclosed commission
In brief:
Unaffected by the ban in 2021, this is where the lender pays the car dealership a fixed amount of commission, which could be a standard amount or a percentage of the amount being borrowed. The lender pays this to the car dealership for arranging the car loan. If the arrangement is secret, it can create a conflict of interest because it could mean the car dealership is unable to act as an impartial broker. And rather than seeking out the lender who will provide the best deal for the customer, the car dealer could be incentivised to pick the lender based on the commission they would receive.
The court case:
Johnson, Wrench, and Hopcroft v FirstRand Bank Ltd (London Branch) t/a Motonovo Finance and Close Brothers Ltd [2024] EWCA Civ 1282[2]
In October 2024, a Judge ruled in favour of three customers. This was a significant ruling because the cases did not only concern discretionary commission arrangements, they also concerned undisclosed commission about fixed commission payments within motor finance. This case is due to be heard by the Supreme Court in 2025. No one knows yet what ruling the Supreme Court will make; for instance, if the Supreme Court were to overrule the Court of Appeal, and say that the ‘undisclosed commission’ was lawful and fair, this will likely harm the chances of customers making successful compensation claims for undisclosed commission.
Case study:
Miss Hopcraft
In early 2014, Miss Hopcraft, a student nurse with a part-time job, visited Jordans, a large motor dealership in Hull, to find a replacement car. She was unable to afford the car without financing, so the dealer helped her secure a hire-purchase agreement through Close Brothers Ltd. Unbeknownst to Miss Hopcraft, Jordans received a commission of £183.26 from Close Brothers for arranging the finance. The Court of Appeal found that this commission was kept entirely secret from Miss Hopcraft, with no mention of it in any documents or pre-contractual discussions.
The judges ruled that this secrecy was a breach of the dealer’s fiduciary duty to Miss Hopcraft. They considered her situation made her vulnerable, as she relied on the dealer to find her a competitive finance offer that met her needs. The Court held that Miss Hopcraft needed to know all material facts that could affect her borrowing decision, including the total commission paid to the dealer and how it was calculated, to give informed consent to the loan.
Example lenders:
Lenders who say they never used discretionary commission (so only undisclosed commission would apply):
Advantage Finance, Bank of Scotland, Carmoola, First Response Finance, Halifax, Moneybarn, Oodle Car Finance, Oplo, Tandem, 1st Stop Finance, and others…
[1] https://caselaw.nationalarchives.gov.uk/ewhc/admin/2024/3237
[2] https://www.judiciary.uk/wp-content/uploads/2024/10/Johnson-v-Firstrand-Bank-and-Hopcroft-v-Close-Brothers.pdf