We need a better way out of the car loans commission problems in 2025

Today’s FT has a ‘Big Read’ (FT-speak for full-page) article on the car loans commission debacle, ‘Car Loans: the next UK financial scandal?’.

The FT report is a good summary and analysis of the situation as go into 2025 and sets out the potential damage that could be inflicted by the courts and regulators on banks, car dealers, brokers and – because of higher prices – consumers.

But it misses what I consider to be the key point about how we got into this mess and how to get out of it.

This is that the underlying issues in the motor finance market are economic, but the mechanisms being used to attempt to resolve them are legal – and as we are seeing, this is not working well for anyone.

The economic problem is one that is quite common, having been seen across many markets. When add-ons, including finance and insurance (F&I) options, are offered at the point of sale of goods and services, market forces tend to lead to the retailer:

(i) reducing the price of the goods (because this is what gets customers in the door); and

(ii) inflating the price of the add-on (because once the customer is in the door, there’s limited competition from price checking).

Markets are not perfect and issues due to what economists call ‘point of sale advantage’ are well known. The UK’s competition authority, the Competition and Markets Authority (formerly the Competition Commission) has investigated various markets and imposed measures to deal with these issues.

Perhaps the closest example is the market for extended warranties for electrical goods, where profit margins were typically very high and shared generously with the retailers. Following a market review (that I worked on at the time) several remedies were put in place in 2003, including requirements to more prominently display the cost of the warranties when the customer is shopping around for the goods, and ensuring that consumers could purchase the warranty after they leave the shop if they prefer.

Given the UK regulatory system has a well-established economics-led route for dealing with these issues without having to resort to the courts, it needs to be utilised now for the motor finance market (and I would suggest including GAP insurance in this, given it’s another area of current concern for the FCA).

But can the FCA refer this matter to the Competition and Markets Authority? Absolutely, yes, there’s an agreement (a ‘Memorandum of Understanding‘) between the two bodies. It states: “If the FCA considers that the CMA is better placed to deal with the matter, it will pass the case to the CMA for it to decide whether, in its view, action by the CMA is required and, if so, what action is appropriate”.

Given the underlying economic problem here is far wider than the financial services (it is about competition across the car market) it’s odd such a referral hasn’t already been made.

Leaving this to the courts, for them to try to solve the problems by applying (what to many appear archaic and irrelevant ) legal principles, in ways that might apply to specific cases but are unlikely to ever provide certainty across the market, just isn’t working.

The FT piece is useful in showing just how damaging the current situation is becoming, not only in the motor market, but with potential ‘extrapolation risks’ across other financial services and even beyond. To me, it confirms that as we enter 2025, it’s time to stop relying on the lawyers to find a way out.

Instead, it’s time for the finance industry to call for the matter to be moved onto the Competition and Markets Authority for a thorough market review. It’s not a move to be taken lightly – the CMA reviews are robust and expensive for all concerned. But at this point, this seems the best potential way out of this massive problem for all parties.

For background on the car finance market, see my report for Apex Insight here.