Consumer Rights, Topics for Individuals

Motor Finance – Unfair relationships between creditor and debtor

Who is the Financial Conduct Authority?

The Financial Conduct Authority (FCA) regulates the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers.

In April 2017, The FCA announced that they were planning to review the motor finance sector. They wanted to understand the use of motor finance products, and to look at the sales processes employed by firms and whether the products could cause the consumer any harm when buying a car on finance.

In order to complete this exercise, the FCA had a series of questions that they wanted to investigate within the industry. These questions were;


• Are firms taking the right steps to ensure that they lend responsibly, in particular by appropriately assessing whether potential customers can afford the product in question?

• Are there conflicts of interest arising from commission arrangements between lenders and dealers and, if so, are these appropriately managed to avoid harm to consumers?

• Is the information provided to potential customers by firms sufficiently clear and transparent, so that they can understand the risks involved and make informed decisions?

• Are firms managing the risk that asset valuations could fall and ensuring that they are adequately pricing risk?


In march 2018 the FCA released an update on their progress.

They advised that Some financial Products such as personal contract purchase (PCP, a form of hire-purchase with lower monthly instalments and a final balloon payment linked to the residual value of the vehicle). may not be fully explained to the consumers by some of the smaller lenders specifically the prudential risks from a potential severe fall in used car values.

However, the FCA identified that the biggest issue surrounding the industry appeared to be the following;


-Whether lenders are adequately managing the risks around commission arrangements, and whether commission structures have led to higher finance costs for customers because of the incentives they create for brokers

-Whether customers are being given the right kind of information, at the right times, to enable them to make informed decisions, and whether firms are complying with relevant regulatory requirements.

-Whether firms are properly assessing whether customers can afford to repay the credit, particularly when lending to higher-risk consumers.


All the above can be tied into the commission rates that the broker will receive from the Lender for arranging the Loan. The issues in particular being;

Has the Broker varied the interest rate in order to receive a higher commission?

Has the Broker informed the consumer that and what amount of commission they will be receiving from the sale of the product?

And finally; if the Broker has amended the interest rate for the purposes of receiving commission has the lender fully assessed the consumer’s affordability of the product?


There have been two different commission rate structures that the FCA have identified to have the most risk to consumers and these are Increasing DiC and Reducing DiC. DiC stands for Difference in Charges

Increasing DiC, also known as ‘Interest Rate Upward Adjustment’ is where Brokers are paid a fee which is linked to the interest rate payable by the customer. The contract between the lender and the broker sets a minimum interest rate, and the fee is a proportion of the difference in interest charges between the actual interest rate and the minimum interest rate.

Reducing DiC, also known as ‘Interest Rate Downward Adjustment’. This is similar to Increasing DiC, except that the contract between the lender
and the broker sets a maximum interest rate.

Both of these products allow the Broker to set the interest rate that is applied to the consumer’s loan within pre-set parameters.

This is where there is a massive risk of product mis-selling, and consumers may be entitled to recover compensation for the unfair commission rates.


If you have had Motor Finance provided through a dealership since 7th January 2005. You may be entitled to a full or part refund of the interest that you have paid or are currently paying.

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