When you borrow money to pay for your car, the law says that you are entitled to transparency about the way the transaction works. This means, you should know who and what you are paying for and who is benefitting from the arrangement.
It is well known that when you take out a loan (car finance), you will have to pay the lender something for providing the credit, so that you are able to pay for something you would not otherwise have been able to afford. You are not the only party with an interest in your car finance agreement because the lender is also benefitting from this arrangement. This is fair because in exchange for monthly payments you are able to enjoy the use of vehicle – whilst the lender has risked their money for deferred profit at the end of the agreement.
But what if someone else is benefitting from this arrangement? Shouldn’t you be entitled to know about it?
The middle-man
When you buy a car, you will usually do so at a dealership. A car can be a very expensive asset and for most people it is not possible to pay in for a car in full on the same day! This means most people need to borrow money so that the car is paid for in affordable monthly instalments. This is where the third party to your finance agreement comes in – the dealership.
Dealerships sell new and used cars and can offer their clients a range of options for buying vehicles, including special offers and promotions on finance arrangements. The dealership acts as a finance broker (also known as a credit broker) on behalf of the lender and is, essentially, a middle-man between you and the lender.
The dealership should not be confused with the lender because they are two separate entities with different functions. This is still the case when the dealership is an outlet for one manufacturer (for example, BMW) and the lender bears the name of the same manufacturer (continuing with the same example, BMW Financial Services).
Unsurprisingly, lenders incentivise brokers (ie the car dealerships) to sell customers their products rather than those of competing lenders. Lender do this by paying the dealership a commission. This arrangement in itself is not unusual or of any concern (in fact it is very common method of incentivizing sales staff) but without transparency, dealerships may not always act in the best interests of the customer. This is especially the case if the dealership stands to gain more from selling a particular product over something more suitable for that customer.
The question is, are you really being offered the best deal or are you being encouraged to choose a product which earns the dealership the most commission? If you had been made aware that the dealership was earning a commission based on a particular type of car finance, could you really be sure that the dealership was acting in your best interests? And could you be sure that a dealership was acting in your best interests where the dealership’s entitlement to commission increased in line with the APR you were offered?
What is my legal claim based on?
Hidden commission payments can give rise to an ‘unfair relationship’ between the lender/broker and the customer. In the 2017 case of ‘Plevin v Paragon Personal Finance’ the Supreme Court ruled that where a customer took out Payment Protection Insurance without being told that a large proportion of the premiums she was paying were in fact commission payments (made by her loan provider to her credit broker) those commission payments, plus interest had to be returned to Mrs Plevin. In so ruling the Court found that had Mrs Plevin known about the hidden commission payments it is unlikely that she would have entered into the loan agreement, and so the relationship between Mrs Plevin and the lender was deemed to unfair under s140 Consumer Credit Act 1974 (as amended).
The Supreme Court judgment in Plevin may be relevant to car finance mis-selling claims in cases where the customer has not been told about the commission paid to the dealership by the lender, and more particularly where the dealership’s entitlement to higher levels of commission depends on them selling more expensive and less suitable finance agreements to customers.