BLOG Why the motor finance commission collective action is likely to fail

The first significant class action type legal case against motor finance providers over commissions has started, with a ‘collective actions’ application filed in early August at the Competition Appeals Tribunal.

The claims are against loan providers Black Horse, Santander Consumer and MotoNovo Finance, for used car agreements between 2015 and 2021.

Here’s five key points about the case, which – taken together – show why it is likely to fail.

The commission models applied were in line with FCA rules at the time: The claim relates only to the period before when the FCA banned Difference in Charges (DiC) commissions. It would have to be shown that DiC systematically broke existing FCA or other consumer protection rules, including Treating Customers Fairly.

Most car dealers did not earn ‘excessive’ profits: Most smaller dealers were not eligible to use DiC for some, or all, of the period of the claim. Those that could are likely to have only had limited flexibility to set prices.

If there were cases of ‘excessive’ profits, finding them will be highly complex:

The Tribunal is likely to struggle to separate ‘unfair’ and ‘fair’ outcomes from use of DiC. Given this is an ‘opt-out’ collective action so all car buyers are automatically included unless they opt-out. It’s unclear how the Tribunal could address the different groups, even if it can find a way of identifying them.

The FCA’s position on DiC would be reviewed: Adding a margin to prices is an entirely normal pricing mechanism. It helps to ensure prices fairly reflect distribution costs. There can be problems where there’s a ‘point of sale advantage’ – as there is in the car dealership where there is only one finance option. But was a blanket ban the right solution?

Since the FCA’s ban on DiC, there is evidence that cost of loans for most consumers have increased:  Most dealers are now limited either to a single rate, or a choice of two or three rates depending on the customer’s situation. For many customers, this lack of flexibility means higher prices. Some now can’t obtain an offer at all from prime lenders through the dealer, and are limited to significantly higher non-prime options.

Not everything dealers have done with finance commissions is right, and the FOS will continue to consider complaints. But not only is this collective action case likely to fail if it proceeds, the Tribunal’s investigation could find that DiC commissions – with suitable controls and guidance in place – are in car buyers’ interests and should be reinstated.

Julian Rose is a director at Asset Finance Policy