Discretionary Commission Arrangements - Complaints and Refunds
Barclays Finance, operating under Clydesdale Financial Services Ltd and branded as Barclays Partner Finance (BPF), has been a notable player in the UK's consumer car finance market. Like many in the industry, Barclays used the discretionary commission model, which has recently come under scrutiny and regulatory reform.
Historically, under the discretionary commission model, car finance brokers, including dealers, had the autonomy to set or adjust interest rates on loans. This practice allowed them to earn higher commissions based on the interest rates they charged consumers. The model incentivized higher interest rates, leading to increased costs for consumers, and was identified by the Financial Conduct Authority (FCA) as problematic due to the potential conflicts of interest and lack of transparency it created (Home).
Responding to these concerns, the FCA banned this model in January 2021. The ban aimed to prevent brokers from setting interest rates linked to their commission, thereby aligning the cost of car finance more closely with market rates and reducing the financial burden on consumers. The FCA's intervention was anticipated to save UK consumers around £165 million annually by eliminating incentives for brokers to inflate interest rates (Home).
The transition away from discretionary commissions has been challenging for the industry, including for Barclays. The FCA's ban led to a surge in complaints related to previous arrangements, compelling firms like Barclays to address potential consumer grievances related to overcharged interest rates under the old model. Notably, cases adjudicated by the Financial Ombudsman Service highlighted the lack of transparency, where consumers were unaware of the commission structures influencing their loan terms. In one case involving Barclays, the ombudsman ruled that the consumer had been unfairly charged under a discretionary commission arrangement and ordered compensation to align with what would have been charged under a non-commission-based interest rate (Home) (Financial Ombudsman).
As part of the ongoing regulatory oversight, Barclays has committed to cooperating with the FCA to review and rectify any detrimental impacts on consumers stemming from past commission-based sales practices. This includes adjusting past agreements and handling complaints within extended timeframes set by the FCA, which has paused the usual 8-week deadline for responding to relevant customer complaints to better analyze the situation and decide on further actions (Barclays Partner Finance).
This situation reflects a broader shift in the UK's motor finance market towards greater transparency and consumer protection, with significant implications for financial institutions' operational and compliance strategies. Barclays, along with other finance providers, is navigating these changes to rebuild trust and adapt to a more consumer-friendly market environment.