Bloomberg Audio Studios, Podcasts, radio news. Hey it's Maren here. Just a reminder before we get started. I've launched a weekly Merin Talks Money newsletter. It is the place the only place to get your micro to macro thoughts on your money and your investments. It hits inboxes on Saturday mornings for Bloomberg subscribers only, So be sure to sign up at Bloomberg dot com slash Merrennewsletter or check out
the link in the show notes below. Welcome to Meron Talks Your Money, the personal finance edision of Meron Talks Money. In these bonus podcasts, we talk about the best strategyde for making the most of your money. I'm Merrin su Stetweb and with me this week senior reporter Harry Wilson and reporter Eleanor Thornberg, replacing John Steppeck, who was away this week outrageously because I'd love to talk to him about this particular subject. We are talking this week about
car commission payments. British car dealers very often don't just sell you cars, they arrange the loans that allow you to buy them. Historically, those loans have looked relatively competitive if you've gone in to buy a car, you've chosen your car, you've sat down with the dealer, he's offered you a loan, you've assumed it's a fixed price, you've taken it. What we're now learning, thanks to an FCO investigation which started in January, is that those prices were
not fixed. They included hidden commissions about forty percent of the time, commissions that use the buyer knew nothing about, and it turns out that that is not legal. Carry tell us what's happened here.
What you've got is a change in the UK car buying market over the last couple of decades, and out of recently. Essentially most people buy a car that're taking out some kind of financing. So the larger part of car for finance purchases these days are going to be with a thing called a personal contract.
Plan, the ones right where you pay you pay a monthly fee or a monthly payment and then at the end there's a balloon payment and you can choose or not choose to pay that balloon payment and take full ownership of the car.
Correct, So what you're doing with a PCP contract is paying the depreciation on the car effectively. So what you've got as agreement between you and the dealer to essentially finance the value of the car as it starts and what they reckon it will be at the end of it, and that then chops up into thirty six or monthly payments normally, So pretty uncontroversial. That's that's the way most people have been buying cars now for more probably more
than a decade. And it's also the way that most car manufacturers car dealers make a lot of their money too, is they're not essentially selling your car, they're selling your financing product when you go in there.
So what's a difference between that and higher purchase HP, because that's included as well, right, So.
Higher purchase is more expensive in terms of your monthly payments, so you're a difference maybe several hundred pounds in what you have to page month. PCP is cheaper, but at the end of it, you will have a larger payment to buy the vehicle at the end, So high purchase is going to be a formality. PCP is probably going to be something in order of several thousand pounds to actually own the car at the end. And the reality is most people at the end of a PCP contract,
probably won't actually buy the car. They'll roll over the deal. The car dealer will say that they've got something like equity in their car, so they'll then take out to buy a new car, take out a new PCP plan, and the sort of the cycle continue.
Like maybe a mortgage been autor just paying for that duty. So you know, from your point of view as a customer, you see an interest rate, maybe it's four percent, five percent, looks kind of fine, you pay you maybe, I mean, this is this is in their years running up to twenty twenty one, is what we're talking about. These kind of deals were made illegal in twenty twenty one. So before that, you got off of a prize, you could afford the price, you paid the price, you've got the car.
Where's the problem?
You just essentially didn't know that some of the money, some of the payments that you were making were actually to the lenders benefit and not necessarily for the car that you're paying for. So the commissions are said actually created perverse incentives all the lenders themselves, which you weren't aware of.
Yeah, the thing here is that the interest rate is effectively discretionary. Yeah, so it's called it a DCA discretion discretionary commission payment. So you could conceivably, if this car salesman wasn't in the way of your deal, you could possibly have got a rate of say two and a half percent or three percent. But because he's in the way, Yeah, adding his bit on told up, maybe you've paid five percent or six percent. And that's the problem. You didn't know what it was exactly.
Okay.
Now, when the FCA originally started to look at this, their main concern was exactly that was these commission payments, was the idea that there was a discretionary commission in there and people didn't know about it. But now the most recent court case, almost recent ruling has widened this out right to any kind of commission payment that you didn't know about. So there are other types of commission payment in here as well.
Can you tell us, yes, a non discretionary which is kind of where the officer where the customer is told that there is going to be commissioned, or the payments that they make. But yeah, as you say, the court case kind of up so kind of any commission that is paid has now been made like unlawful behavior.
So flat fee is paid by finance companies to the does bring all franks.
Yeah, so if you're Barclays and you pay the commission to the lender, you are inherently involved because you've played a part in paying that commission, which is now illegal.
Okay, So we'll come on to this being horrible for the banks because they must be signally going, oh lord, here we go again, because I remember the PPI scandal and the billions and billions they had to pay out then. But for a consumer now here you are, You've got your car, your car might even be paid off at this point, and suddenly somebody's saying to you, do you know what? You could get a pile of cash out of this. How do you go about doing that?
Well, you'd have to make a claim by the Financial Oddmusman Service, And the kind of actions of the FAA are certainly encouraging off people to do that. As you say, they've opened up to not just kind of any kind of form of commission. So it actually be quite straightforward. I mean, it just depends on how many people decide to do that, I suppose, but it is quite a straightforward procedure. You just make a complaint and see how
much money you're entitled to. I think it depends on where exactly you start to the car finance.
Yeah, I'm the first thing to do is to find out whether you've actually had this discretionary commission in your deal, because obviously, because you won't talked about it exactly, you don't know if you've got it or not. So the first thing, presumably is to go to your car finance company and say is this in there? So you need to write a letter to them, and there are template letters you can use. Money Saving Expert has one, which
has one, you can find others on the internet. So the first thing to do, I would guess, is to use it a template to find out whether you actually might be owed any money or not. And I think it's about forty percent of car finance deals did have this discretionary commission in it. So that's the first step, right, yes, And then then you.
Wait, yes, wait and see with fingers crossed.
And we know the timeframe.
It's not clear as you say, it's a straightforward procedure, so it could suddenly amass all at once and that might clog things up. But if you know the banks on the lenders are expecting it, it may well not take long at all.
Yeah, I'm I think that the period in which the banks or finances can respond has been taken out to the end of the next year. Yes, a lot of widens the window even more exactly, so you've got a long time to do it. But on the other hand, you might as well get started because we don't know how this this stuff is going to move. And I think the FCAS there are already twenty thousand complaints or so open, so there's a lot more complaints to come.
And if there is this huge volume and they decided to go with both discretionary and a discretional interest in other types of commission, you're talking potentially hundreds and hundreds of thousands of claims. So, you know, exciting times for consumers.
I mean, Harry, you probably remember, as I do, the PPI payments and it came out to the fifty billion or some was a genuine boost to the consumer economy, and they said there's anything that Rachel Rice could do with right now would be a fifty billion booth from the banks into the consumer economy.
Yeah, I mean, it's crazy when you think back. I think it was around about twenty ten twenty eleven, one of the big US investment banks came out with its worst case scenario for PPI and it said something in a reader of about three point twenty five three point five billion pounds of claims was the worst case, and this was seen as crazy at the time. And some months after that Lloyd's actually made a three point five billion pound provision, which again was seen as way over
the top. It's never going to need all that money. What was they doing? Well, when Lloyd's got to about thirty billion, I think most people realized that the three point five was, if anything, a massive underrestment. So the question for the industry really at the moment is are we looking at something here that could balloon into a PPI site situation? Are the numbers at the moment actually relatively small fry compared to what potentially could be paid out here?
So Ragiraries must be you know, licking her lips.
Well, yes, I mean there is some quite serious academic money going from the banks.
Yeah.
Well, this thing is that it is genuinely stimulative because this is relatively small amounts of money, you know, a few thousand pounds here, and it tends to be money that people aren't going to put into a saving scout. It's money that gets immediately recycled into economy. You know, people buy a new TV or something like that. So there could be a short term sugar rush if there is, you know, if this does turn into a mini or even a major PPI type situation.
But there was a suggestion from Moodius the other day there will come out of the thirty billion US so, as you said, isn't it billion? That really is real money. And of course last time a lot of the PPI money was recycled into cars. Do you remember that.
Yeah, yeah, so look out life comes with so it's possible, you know, this money goes straight back into the pockets of the car companies through people buying new cars.
That like PPI. When it's a sort of mass redress system, right, everyone gets there's a fairly standard payment system. It's really very efficient way to get money into the pockets of ordinary people. It's like another people's Q.
Quite. The only thing I suppose banks would question would be to say, well that's all great, but then that puts our cost of capital. We are seen as increasingly uninvestable. Therefore we need to now pass that on in terms of higher costs across the board in terms of all our products. So yes, everyone sees a or at least those who bought these products will get the money. What you might see though, over the time, is a gradual increase in the costs of a range of financial products,
which generally it won't be good for anyone. But you know that's a longer term problem, and in the here and now, you know a few thousand pounds would be quite nice to a lot of people.
Definitely, do you have any sense at all of it when you say a few thousand pounds of exactly how this might work. I mean, the only thing I've seen is one a couple of the rulings so far, it looks like there's about two percentage points in it in terms of the discretionary commission. And then the FS insisted on one of those cases that went through that the difference was paid back, but with an interest rate of eight percent on that gap.
Yeah, so eight percentage is the standard rate that you often get applied in these types of cases. At the moment, it's all a bit up in the air because we've just had these court rulings. So everything is really hinting on now the appeals, and which is why the FCA itself has actually issued a notice to all of the different players in this, all the car finance companies, to say there's a moratorium and moments one claims pending the
outcome of these legal cases. But after that, and I guess we're really waiting to see if the Supreme Court will take up the case. I think the expectation is the Supreme Court will take up the case and probably take it up pretty quickly, and then once we've got a ruling there, then you have a far better idea of how this is all going to play out and
what people might reasonably expect. But obviously anyone telling it at the moment exactly what you can get can't be telling the truth because no one knows until the course of.
Rule in this well, that takes us neatly to the assumption that there's going to be a big pal of scams around this in the same way that they were around PPI amoralty that will be totally legitimate claims companies that will be suggesting that they help you with your claim right eleanor that that's going to happen just like it did last time. Yes, in theory.
Yes, when I was speaking to people about it last week, they were kind of saying you might also get lawyers who jump on it as well, the kind of ambulance chasers who will kind of make money and profit off of people being on search amount whether or not going to have a claim and if they can take it to court.
So yeah, I'm sure there will be. Well, you can already see those on social media. They're already out there saying, you know, you can claim going back twenty years etc. On your car finance. But as we've discussed as a much easier way to do it, you don't have to use a claimed company. You simply use one of the template letters they are exelcted you very much. Look out for the difference between a legitimateclaims company, which again we
don't suggest to use, and a scam. And if you do use a logist mcclaims company, you will find that you'll be giving part of your compensation away to them, which you don't really want to be doing either. No, definitely not.
There's also an interesting question here for the car industry. There obviously the lights of VW aren't doing so well, at the moment factory closures. Now you see that potentially VW's own financing arm could obviously be among those companies are going to have to pay out compensation costs to
people who've been sold these products over decades. So it's probably just another issue for the car manufacturers already struggling with evs, already struggling with cost of living crisis, all of these kind of things, and it's just another problem for them which is probably very unwelcome.
Interestingly, there was an article on the newspaper the other day, and I can't remember who wrote it. I just noticed the headline and it said that the headline basically said you shouldn't be claiming compensation for this, don't be greedy, And I thought, well, that's not quite right, is it, because who's been greedy already? Well? Quiet, thank commission takeers. So I think the only thing that I would have to add that is that I can't think of another
country anywhere. It must be only in the UK where a massive miss selling scandal is actually a positive, because in my health, our consumers out we will see, we will see. Thank you both very very much, indeed, thanks for listening to this week's Maren Talk to Your Money. If you like our show, rate review, and subscribe wherever you listen to podcasts. Also be sure to follow me and John on ex or Twitter. I am at Maren
sw and John is John Underscore Stepping. This episode was produced by some Asidi production support and sound designed by Moses and Questions and comments on this show and all our shows are always welcome. Our show email is merin Money at Bloomberg dot net, and of course thank you to Harry and Elanov joining us today and giving us your insights. Very grateful for that. Want to listen to episode of Married Talks Money ad free? Become a Bloomberg
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