There are a number of different commission models being used by lenders and dealerships, sometimes simultaneously. The following examples are some of the more common (and compliant) commission models used when selling car finance and where used, what information the customer must receive before entering the agreement:
| Flat Fee | Disclosure |
|---|---|
| This is where the amount of commission does not depend on the type of finance product, size of the loan or length of agreement. This model is less likely to be abused because it is not discretionary and does not incentivise the dealership to sell a particular product. | – The dealership must confirm whether it works with one or more lenders. – If it does, whether commission paid by other lenders would vary and whether the amount payable by the customer is affected by the commission the dealership receives. The dealership should also mention that different lenders may offer different interest rates. – The dealership must state the nature of the commission. |
| Fixed Rate Commission | Disclosure |
|---|---|
| This is when the commission is calculated as a percentage of the total balance of the loan. This model is one of the fairer models because the dealership and the lender will have to show that the agreed balance has been arrived at fairly via internal systems and controls. | – The dealership must confirm whether it works with one or more lenders. – If it does, whether commission paid by other lenders would vary and whether the amount payable by the customer is affected by the commission the dealership receives. – The dealership must state the nature of the commission including how the commission mechanism works, for example, by disclosing that the commission is a percentage of the balance. |
Flat fee or fixed rate commission based on age or type of vehicle | Disclosure |
|---|---|
| As the name may suggest, the amount of commission varies according to the age or type of vehicle being sold. The lender and dealership must be able to show that the commission rates do not lead to incentives that work against the customer and the lender must only offer higher rates of commission where justified by extra work done by the dealership. | – The dealership must confirm whether it works with one or more lenders. – If it does, whether commission paid by other lenders would vary and whether the amount payable by the customer is affected by the commission the dealership receives. The dealership should also mention that different lenders may offer different interest rates. – The dealership must state the nature of the commission and explain that it earns more from sale of some products rather than others and why it does so. |
| Rate for Risk | Disclosure |
|---|---|
| This model is based on the lender setting different levels/bands of commission depending on the rate of APR. The lender and dealership must be able to show that the commission rates do not lead to incentives that work against the customer and the lender must offer higher rates of commission only where justified by extra work done by the dealership. | – The dealership must confirm whether it works with one or more lenders. – If it does, whether commission paid by other lenders would vary and whether the amount payable by the customer is affected by the commission the dealership receives. The dealership should also mention that different lenders may offer different interest rates. – The dealership must state the nature of the commission and how the rate for risk mechanism works and whether the amount payable by the customer to the dealership is affected by this. |
| Flat fee or fixed rate commission based on financial product | Disclosure |
|---|---|
| Unlike other flat or fixed fee models, this commission structure is more open to abuse because it could lead to dealerships selling a particular type of finance product when there was an alternative, and more suitable option for the customer. The lender and dealership must be able to show that the commission rates do not lead to incentives that work against the customer and the lender must only offer higher rates of commission where it is justified by extra work done by the dealership. For example, you may have been sold a PCP agreement when your needs could have been better met by a Conditional Sale agreement or a standard HP agreement. | – The dealership must confirm whether it works with one or more lenders. – If it does, whether commission paid by other lenders would vary and whether the amount payable by the customer is affected by the commission the dealership receives. The dealership should also mention that different lenders may offer different interest rates. – The dealership must state the nature of the commission and explain that it earns more from sale of some products than others and why it does so. |
| Discretionary Model (not compliant) |
|---|
| This commission model – been banned since January 2021 – was highlighted as a particular concern within the recent FCA report. This model allows the dealership to vary the APR, and, in tandem, the commission amount per agreement. There are a number of discretionary models and these are the ones which have been used most frequently in the sale of car finance. |