Dealer finance under fire amid crackdown on 'secret' revenue

Finance has been a big profit generator for car dealers | Image: Getty Images

Consumers warned that dealers will be looking to make up for lost earnings from hidden commissions

Dealers will be looking for new ways to compensate for lost earnings, consumers are being warned, after the shock ruling that they must either disclose or drop ‘secret’ commissions charged on finance deals for new and used cars.

Commissions paid unknowingly by customers have accounted for large chunks of profits for dealers, which have teams dedicated to growing revenue from finance and insurance deals, or ‘F&I’ (including GAP insurance).

For example, Penske, owner of UK dealer group Sytner, disclosed that F&I income totalled £1352 per car on average in the nine months to the end of September. The figures, which included its US operations, show that finance and insurance generated 3.1% of its revenue but accounted for a whopping 19% of its overall gross profit. 

The UK court of appeal ruling at the end of last month means dealers will now have to be upfront about that commission. Experts believe dealer income will fall as consumers push back against paying commission. “From the dealer point of view, it means they need to compensate for that loss of income,” said Steve Young, managing director of dealer consultants ICDP.

The commission comes from finance companies that are incentivising dealers acting as brokers. The practice has been under scrutiny by the Financial and Credit Authority (FCA) watchdog since January, with lenders already bracing themselves to pay out compensation example, Lloyds Bank, owner of Black Horse finance, has set aside £450 million in anticipation of lawsuits. The practice has been compared to the PPI scandal, although that correlation had earlier been played down by the FCA.

This new ruling, unrelated to the FCA investigation, has changed dramatically how dealers can do business. “This is very unexpected. We have now got clarity, albeit unexpected,” said Adrian Dally, director of motor finance and strategy at the Finance and Leasing Association. “The only way to avoid the disclosure and consent process is to take no commission.”

Most finance companies are back in business after briefly pausing operations to digest the meaning of the ruling, which was brought specifically against Black Horse and FirstRand Bank by three affected consumers.

The changes mostly affect buyers of second-hand cars through dealers, said Young. New cars are mainly financed through the manufacturers’ own finance house.

The wider choice of finance for buyers of second-hand cars means dealers can steer customers towards specific finance companies, but under the current system the dealer is incentivised to choose the deal that offers them the most commission, rather than finding the lowest interest rate.

With this revenue channel now in effect blocked off, dealers will look at alternative methods. One way to increase revenue would be to “push either existing admin fees up or introduce admin fees” Richard Walker, data and insight director at Auto Trader, told dealers in a webinar last week.

However, the company said data from its website showed dealer car ads that included an admin fee were holding steady at around 12% following the ruling, suggesting dealers had avoided that route so far.

“Dealers will have to pay the sales people more to make up for the loss of commission,” added Young.

As well as potentially adding fees, dealers could also extract more profit from used cars they sell, either by offering less for trade-ins or charging more on the forecourt.

As ever with consumer finance crackdowns, the hardest hit will be those who were savvy enough to shop around or haggle down the interest rate. “Ultimately if there’s going to be a big financial hit to dealers or car finance banks, it’s going to push up the cost of finance,” said David Bailey, professor of Business Economics at Birmingham Business School. “On the other hand, there’s going to be some serious compensation for consumers, which could mean they go out and buy new cars.”