Some car buyers are being overcharged by more than £1,000 when they take out a loan to buy a car, the UK’s financial watchdog has warned.
The Financial Conduct Authority (FCA) said the industry practice of allowing dealers to set their own interest rates was costing consumers £300m a year.
Dealers overcharge to boost their commission, the FCA concluded.
But the Finance and Leasing Association said the watchdog’s survey was “based largely on out-of-date information”.
Conflicts of interest
The regulator launched its investigation into the car finance market in April 2017 after there was a rapid surge in consumer credit led by car dealership finance.
At the time, it said it was concerned about a lack of transparency and potential conflicts of interest.
In its final findings on motor finance, the FCA concluded that the widespread use of commission models, which allow brokers discretion to set the customer’s interest rate and thus earn higher commission, can lead to conflicts of interest that are not controlled adequately by lenders.
It said the practice can lead to customers paying significantly more for their motor finance.
Jonathan Davidson of the FCA said: “We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves.
“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments.
“This is simply not good enough and we expect firms to review their operations to address our concerns.”
