The Point of Sale motor finance market in the UK is substantial and estimated to be worth around £44 billion per annum. Point of Sale motor finance interest rates can be significantly higher than other types of borrowing, especially when financing used cars. The motor industry argues that new Point of Sale financing is a cost-efficient method of financing a car as they are often subsidised by the car manufacturer. Accordingly, the practice of loading interest rates on new cars is negligible. However, it is the used car sector where much of the bad practice has existed for many decades.

A recent report by the Financial Conduct Authority has identified that consumers may not always be getting the best interest rate for their car finance loan. Risk profile, “prime borrowers” may be paying significantly more for their loans, with the rate difference being paid as commission, by the finance lender to the car dealer.

High commissions are offered by lenders in return for increased volumes of new business. This commission structure cab also be seen as a requirement in the motor finance lending sector, due to the intense level of competition within this sector. Dealers and brokers have become accustomed to demanding higher commissions from lenders over the years.

With a typical finance deal, dealers and brokers can determine the interest rate to the customer and therefore seek to maximise the commission to the highest level throughout their sales process. Commissions are used in the sales process to contribute to the overall profitability of the dealer. This means that most of the profit made by car dealers is on used cars and relates to the financial commission rather than the actual car (metal). In some instances, the commission could contribute towards 70-90% of the brokers profits.

Dealer and brokers however, are generally not concerned with the profitability of the lender. It should also be noted that it is the lender that bears the ultimate risks of default and fraud.

Lenders tend to pay the commission to the brokers upfront and in cash, which arguably increases the dealer base rate and feeds through to the end consumer due to the cost of provisioning for this upfront cash payment.

Generally, there is little or no commission disclosure to the customer by either the dealer or the lender – this is against the recommended practice by the Financial Conduct Authority.

Financial technology used by dealers and brokers at the Point of Sale can be utilised to optimise the commission level paid to the dealers – usually without the consumer having any knowledge of this practice.

In summary, the commission structures in the motor finance industry are used as a vital part of the sales process and contributes both directly and indirectly towards the profits of the dealers and brokers. In addition, the these structures and incentives are used to increase the finance penetration at the dealers, both at the group and individual broker level.