Discretionary Commission Arrangements Explained
Understanding discretionary commission arrangements (DCAs) is essential to understanding why millions of UK car finance customers were overcharged — and why the law entitles them to compensation. MotorRedress (www.motorredress.co.uk) has put together this detailed explainer covering how DCAs worked, why the FCA banned them, and what their existence means for your right to claim.
What Is a Commission Arrangement?
When you finance a car through a dealership, the dealer is not simply selling you a car. They are also acting as a credit broker — someone who introduces you to a lender and arranges the finance product. Credit broking is a regulated activity under the Financial Services and Markets Act 2000 (FSMA), and firms engaging in it must be authorised by the FCA.
As with most intermediary services, credit brokers are paid for the business they introduce. In motor finance, the lender pays the dealer a commission each time a customer takes out a finance agreement. This is entirely standard practice — commissions are not inherently problematic. The problem arises when the structure of the commission creates a conflict of interest that is hidden from the customer.
How Discretionary Commission Arrangements Worked
Under a Discretionary Commission Arrangement, the lender gave the dealer a permissible range of interest rates — say, between 4% and 14% APR — and allowed the dealer to set the rate anywhere within that range for a given customer. The commission the dealer earned was directly linked to the interest rate chosen.
The mechanics varied by lender, but the most common structure was:
- Flat commission for every deal: a base amount regardless of rate, plus
- Differential commission based on the rate spread: the higher the rate above the minimum, the larger the additional commission
This meant that a dealer who set a customer's rate at 12% APR (when 6% APR was available) might earn twice the commission compared to setting it at 6% APR. The customer paid £2,000 more in interest over the term of the agreement. The dealer pocketed the extra commission. The lender kept the higher interest margin on the retained balance.
At no point was the customer told that:
- The dealer had any control over their interest rate, or
- The dealer had a direct financial incentive to set that rate as high as possible.
The FCA's Findings
The FCA's Consumer Credit Review (2019) and subsequent Motor Finance Review (2020–2021) found compelling evidence that DCAs caused widespread consumer harm. Key findings:
- Customers with identical credit profiles received materially different interest rates depending on which dealer arranged their finance.
- The variation in rates was correlated with commission structures, not with differences in credit risk.
- A significant proportion of the interest rate variation was not explained by legitimate pricing factors.
- There was no requirement for dealers to consider whether the rate they set was in the customer's interest.
- Commission payments were not disclosed to customers in a way that enabled informed consent.
The FCA estimated that consumers paid £300 million more per year in aggregate than they would have under a fixed-commission model. Compounded across the 14-year period from 2007 to 2021 and adjusted for the interest those overpayments generated, the FCA arrived at an aggregate consumer loss of approximately £8.2 billion.
The January 2021 Ban
On 28 January 2021, the FCA's ban on discretionary commission arrangements in motor finance came into force. From that date, lenders offering motor finance through credit brokers could not use commission structures that allowed brokers to vary the interest rate in a way that affected their commission. All new agreements had to use fixed commission models.
The rule that implemented this ban is CONC 4.5.6R (Consumer Credit sourcebook), which provides:
"A motor finance firm must not use a commission arrangement in relation to a regulated credit agreement secured on a motor vehicle that allows the credit broker to increase the customer's interest rate by exercising its discretion to vary the interest rate, if the commission increases as a result."
The ban was prospective — it applied only to new agreements from 28 January 2021 onwards. It did nothing to compensate customers who had already paid inflated rates under agreements written before that date.
Why the Ban Did Not Resolve Historical Claims
The FCA's decision to implement a forward-looking ban rather than a simultaneous redress scheme was controversial. Consumer advocates argued that millions of customers were left without a clear route to compensation. Lenders argued that historical liability was unclear because:
- Some customers may have received broadly disclosed information about commission
- Rate variation could be explained partly by legitimate commercial factors
- The disgorgement remedy had not been established by court precedent
This standoff continued until the Court of Appeal's October 2024 ruling in Johnson v FirstRand, which swept away most of these defences by establishing that a credit broker receiving a commission that creates a conflict of interest must obtain the customer's fully informed consent — and that generic commission disclosures do not meet that standard.
What "Fully Informed Consent" Means
The concept of fully informed consent is at the heart of the DCA claims. The Court of Appeal and subsequently the Supreme Court in [2025] UKSC 33 were clear that for a customer to give informed consent to a commission arrangement, they would need to know:
- That a commission is being paid — not just that the dealer "may receive a fee", but that a commission is specifically being paid by the lender for arranging this agreement.
- The amount of the commission, or at least its basis of calculation.
- That the commission creates a conflict of interest — specifically, that the dealer has a financial incentive to set the interest rate at a level that benefits the dealer at the customer's expense.
- That despite this conflict, the customer consents to the arrangement proceeding.
In practice, none of the major lenders' standard documentation met this standard. The typical disclosure — if it existed at all — was a brief, generic statement that the dealer "may receive a commission from the lender". This does not disclose the link between rate and commission, nor the existence of the conflict of interest.
DCA vs Flat Commission: The Critical Distinction
It is important to distinguish between:
| Type | Description | Conflict of Interest? | Covered by Redress? |
|---|---|---|---|
| Discretionary Commission (DCA) | Commission varies with interest rate set by dealer | Yes — dealer incentivised to overcharge | Yes |
| Flat/Fixed Commission | Same commission regardless of rate | No — no incentive to inflate rate | Generally no |
| Undisclosed Commission (any type) | Any commission not disclosed at all | Potentially — depends on facts | Possibly, via separate route |
The DCA redress scheme specifically targets the first category. The third category — undisclosed commissions of any type — may also give rise to claims, but the legal basis and available remedies are slightly different, and such claims are likely to be handled differently under the FCA's proposed scheme.
How Lenders Tried to Argue Compliance
During the FOS complaint process (before the Court of Appeal ruling clarified the law), lenders advanced several defences:
"We disclosed commission in our standard terms."
Courts and the FOS found that generic disclosures buried in standard terms did not constitute informed consent, particularly where the conflict of interest (the link between rate and commission) was not specifically identified.
"The customer could have negotiated the rate."
This was largely rejected. The customer had no way of knowing that the rate was negotiable, or that their dealer had a financial incentive to refuse to negotiate.
"The rate we charged was commercially reasonable."
The disgorgement remedy under [2025] UKSC 33 does not depend on the overall rate being unreasonable. Even a relatively low rate generates a claim if it was set under a DCA without informed consent.
Conclusion
Discretionary commission arrangements were a structural flaw in the motor finance market that the FCA allowed to persist for over a decade before banning them. During that period, dealers had both the opportunity and the incentive to overcharge customers, with no obligation to disclose the arrangement. The Supreme Court has now confirmed that this constitutes a breach of fiduciary duty, and the FCA is building a redress scheme to compensate the estimated 14.2 million affected consumers.
To find out whether a DCA applied to your agreement, visit MotorRedress.
This article is for educational purposes only. Compensation amounts vary. Eligibility criteria apply.
Originally published on MotorRedress
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