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What types of commission did car dealers earn on PCP finance?

Writer: Claim-Smart Team
Claim-Smart Team
Oct 7
6 min read

  • Car dealers were normally paid commission by the lender for arranging PCP finance. The main types were discretionary commission, where the dealer could raise your interest rate to earn more, and fixed or flat-fee commission, where the lender set the amount.

  • The type of commission doesn't decide whether you could be owed compensation under the FCA's scheme. What’s important is whether the compensation received wasn't clearly explained to you.

  • Most people can't tell which type they had from their paperwork. You can ask your lender yourself for free, or Claim-Smart can help you find out and manage the complaint for you.


If you took out PCP finance through a car dealership, there's a good chance the dealer was paid commission for arranging it. That on its own wasn't wrong, as dealers regularly acted as the middle man between a customer and the lender. Being paid for that was a normal part of how car finance worked.


The problem came from how some of that commission was set up, and whether customers were ever told about it. 


Some commission arrangements gave dealers a reason to charge more interest, while others meant the dealer earned a large amount of money or only offered finance from one lender.



Why were car dealers paid commission on PCP finance?


Car dealers were paid commission because most of them acted as brokers, introducing customers to a lender and arranging the finance on the lender's behalf. The lender then paid the dealer commission for each customer it brought in.


Commission was legal and very common. What's being looked at now is whether customers were told enough about it, and whether the way it was set up could have left them paying more than they needed to.


What were the main types of commission on PCP finance?


The main types of commission on PCP finance were discretionary commission, fixed or percentage commission, and flat-fee commission. Some dealers also had tied arrangements with a specific lender, which affected which finance deals you were shown.

The biggest difference between them is whether the dealer could change your interest rate.


With a DCA, the dealer could raise your rate to earn more commission, while with fixed or flat-fee commission the lender set the dealer's pay and your rate couldn't be moved to boost it. 


A tied arrangement was different again, because it was about which lender the dealer used rather than how much commission it earned.


Discretionary commission arrangements (DCAs)


Under a discretionary commission arrangement, or DCA, the lender let the dealer choose your interest rate within a set range. The higher the rate the dealer picked, the more commission they earned.


This gave the dealer a financial reason to offer you a higher rate than you might otherwise have been given, and most customers had no idea it was happening.


Here's an example. Imagine two people buy the same car on PCP from the same dealer, borrowing the same amount, and the lender allows rates anywhere between 5% and 10% APR. 


One is offered 5% and the other 9%, even though both could have qualified for the lower rate. The dealer earns more commission on the second deal, and that customer pays more interest over the period of the agreement.


DCAs were common. According to the FCA, around 61% of motor finance agreements involved a discretionary commission arrangement between April 2007 and January 2021.


The FCA banned DCAs in motor finance from 28 January 2021, so a PCP agreement taken out after that date shouldn't have one.


Fixed or percentage commission


With fixed commission, the lender decided how much the dealer would be paid, and the dealer couldn't change your interest rate to earn more. The amount was usually a set amount or a percentage of what you borrowed. You may also see this called non-discretionary commission. 


Flat-fee commission


Flat-fee commission was a single, set amount that the dealer received for each finance deal, regardless of how much you borrowed or what interest rate you paid.


Tied arrangements


A tied arrangement wasn't a way of calculating commission. It was an agreement between the dealer and a lender that the dealer would only use that lender, or give it the "right of first refusal", meaning the lender got the first chance to offer you finance before anyone else.


This matters because you may have thought the dealer was looking around for a good deal for you. But in reality, it may have been influenced by an agreement you were never told about.


Which types of commission are covered by the FCA's redress scheme?


The FCA's redress scheme covers PCP agreements where you weren't clearly told about one of three things: a DCA, a high commission or a tied arrangement. Commission without one of these features isn't covered.


What counts as high commission?


Commission counts as high under the scheme if it was at least 39% of the total cost of credit and at least 10% of the loan. The total cost of credit is everything you paid on top of the amount you borrowed, mainly interest and fees.


So, say you borrowed £15,000 on PCP and paid £3,000 in interest and charges. Commission of £1,500 would meet both tests, because it's 50% of the cost of credit and 10% of the loan.


When are tied arrangements covered?


Tied arrangements are covered unless the lender can show the link was obvious, for example where the dealer and the lender shared a common or similar name. So if you bought a car from a dealer using that manufacturer's own finance company, the tie may not count.


What isn't covered?


Even where one of these arrangements applied, the scheme treats some agreements as fair. These include:


  • Commission of £120 or less on agreements that began before 1 April 2014, or £150 or less from that date

  • Agreements where you weren't charged any interest

  • DCAs that weren't actually used to earn discretionary commission

  • Cases where the lender can prove that it was fair not to tell you or that you didn't lose out


It helps to understand the signs your car finance may have been mis-sold before you complain.


How do I find out what type of commission my PCP agreement had?


Ask your lender. Your paperwork is unlikely to say, because in most cases the commission wasn't clearly explained when you signed.


Your lender is the finance company you made your monthly payments to, not the dealer. If you're not sure who that was, you can check which lenders you can complain to.


Some lenders have already written to customers confirming which commission type applied. If you've had a letter like this, check whether it says you need to do anything else.


My lender says I didn't have a DCA. Can I still make a PCP claim?


Possibly, if your dealer was paid fixed or flat-fee commission, your agreement could still be covered if that commission was high or the dealer had a tied arrangement with the lender, and you weren't told.


To work it out, you could ask your lender:


  • How much commission was paid to the dealer

  • Whether that commission met the FCA's high commission test

  • Whether the dealer had a tied or first-refusal arrangement with them


You can find out more about whether you might be entitled to a PCP claim in our separate guide.


Has your lender's letter about commission left you unsure where you stand? Claim-Smart can help you make sense of it and follow up with the right questions.


So, what types of commission did car dealers earn on PCP finance?


Car dealers mainly earned discretionary, fixed or flat-fee commission on PCP finance, and some also had tied arrangements with a specific lender. Only some of these are covered by the FCA's scheme: DCAs, high commission and tied arrangements that weren't clearly explained to you.


You won't normally be able to tell which type you had from your paperwork, but your lender can tell you. You can contact them yourself for free, or get help if you'd rather not deal with it alone.



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