Discretionary commission: what is it and why does it matter?

Discretionary commission has been hitting headlines in recent weeks following an announcement from the Financial Conduct Authority (FCA) that historical misconduct is being investigated.

In the spotlight? Providers who inflated interest rates and therefore their income on Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements provided prior to 28th January 2021.

This date is important as it was when the FCA banned discretionary commission.

There is resonance with the well-known Payment Protection Insurance (PPI) scrutiny that dominated in the 1990s – 2010s. 

We all got one (or many) of those ‘Have you been miss-sold PPI’ calls, didn’t we?

This too sought to uncover poor sales practices and protect customers from hidden, inflated sales commissions.

But what is discretionary commission in this new investigation? What does it mean for those of us who finance our cars? And why are we only hearing about it now?

The investigation

Over 80% of new cars are funded through PCP.

Now that's a lot of cars. 

The concern of the FCA here is that PCP and HP products were open to hidden commission uplifts disguised as non-negotiable interest rates.

Essentially, customers were quoted inflated APR figures and this extra income was banked by the provider.

If the investigation, which is due to conclude in September this year, finds evidence to corroborate these suspicions, affected customers could be owed a refund on all or part of this hidden uplift.

If you financed a motor vehicle by PCP or HP before 28 January 2021 and it was subject to APR, this could have been you. 

What is commission?

Commission is a fee paid to a business, agent or employee for facilitating a piece of business or providing a service.

In this context, commission refers to the fee charged by dealers or brokers for finance products they've arranged on the funder's behalf.

It's a perceivably dirty word for many, accompanied by a suspicion that it manipulates both the attention and guidance of businesses and sales people to line their own pockets rather than to provide great value or fill the customer with genuine joy.

But it is also, unavoidably, a vital and justified income stream for many businesses and employees alike. And, when done right, it recognises a valuable transaction for all involved (including the customer) that likely wouldn't have taken place otherwise.

In spite of the potential of sizeable evidence to show otherwise, it is our aim to prove that the presence of commission need not always be feared or considered inseparable from either customer value or customer joy.

Discretionary commission and Personal Contract Hire (PCH)

It is really important to highlight that the FCA's investigation is not applicable to PCH or leasing. 

Although leasing is still car finance and with an element of commission, it is not subject to variable APRs.

In the leasing world, the interest rate (which is linked to APR) is set by the funder and broker commission is calculated separately. This can be specified or capped by the funder, and can be (and often is) reduced down by the broker to offer a better deal.

Industry competition is fierce and, like everywhere else, providers know that price comparisons are a staple feature of buyer considerations. Commission affects monthly payments and inevitably therefore buying decisions.

So, competition is an inadvertent driver of great customer value - just as it should be.

And while there is a lot more to providing value than simply the price charged (as we get onto later on) it is inevitably a crucial component.

Commission disclosure and car leasing

Carparison were proud to be the first UK leasing broker to openly publish the commission in each regulated agreement.

Four years on, this still goes beyond the legal requirement to share this figure only when it is requested. And sits alongside all other mandatory specifications on transparency around how brokers make money.

This includes the most recent change: The Consumer Duty Act. Introduced by the FCA in 2023, this governs leasing brokers and protects vital customer interests by setting strict codes of conduct.

The overriding response to this honesty has been: 'We thought you'd be making much more!'

When is commission a good thing?

We're under no illusion that cost has a direct correlation to value. 

But we also know that neither being the cheapest or the most expensive guarantees value either. 

We've all paid too much for a disappointingly small and oily tub of face cream that promised to cure all blemishes.

Or that (also oily) microwaved fry up that promised to cure even the worst of hangovers.

It is the very purpose of brokers of all kinds to provide value through their unique product knowledge, long-nurtured industry relationships and well-crafted product offerings.

Put simply, ramping up value by providing informed outcomes while saving you time and money.

It's the same whether you're looking for a mortgage, a holiday or a car.

Brokers are here to listen to your needs, then to delve into their extensive product catalogue in order to propose the best possible fit/s.

Even better, when they can use their industry buying power to negotiate better deals based on their ability to sell at volume.

But all this comes at a cost.

Providing good quality customer service, acting sustainably, and being a good employer are all pricey non-negotiables that have to be recouped through product or service costs.

You may also see higher commission on deals where a greater amount of work or risk has been required behind the scenes to reach the rate you are seeing. Brokers can harbour the risk of buying any cars they don't sell, for example. In many cases you'll see higher commission values on better lease deals for that reason.

What this doesn't mean is that you should expect the prices you pay to be higher than anywhere else. Quite the contrary if you look at our collection of top lease deals.

When it is honest, indiscriminate and proportionate, commission should be considered as a vital means to secure great customer value. Not a threat to it.

How does car leasing differ to PCP?

Effectively a long-term rental, leasing a car allows you to drive away a new car for a set term, mileage and monthly fee.

There are a few differences between PCH and PCP but the main one is that you will not have the option to own the car at the end of your term.

If you’re one of the 80% of PCP customers who end up handing their car back it is likely that you’d have paid less if you'd leased instead.

Conclusion

The source of the FCA's investigation is an important one. We are anticipating the outcome with interest, and hope a fair outcome is achieved for all involved.

It is undoubtedly an important step towards eradicating the very practices that give commission a bad name. But, we also hope that perceptions of commission do not wholly degrade into the realm of secrecy and suspicion as a result. 

We hope that customer value continues to be judged on elements like transparency, sustainability, support levels and product quality - all of which may not be 'cheaper' but provide value in abundance.

To lose the power of quality, preference and branding to impact perceived value would be catastrophic to a core facet of value in itself: choice.

The issue being investigated doesn't appear to be the income itself but that it was potentially masked and/or applied unequally. But has that been lost in the noise?

It is the responsibility of those reporting on this investigation to avoid sensationalism, so to correctly inform and support. Without this, and even with the best of intentions, the process threatens the very thing it is trying to protect.