Central Bank bans car loan commissions that rise when the borrower’s interest is higher

The Central Bank has written a so-called “Dear CEO” letter to firms involved in lending for car purchases to warn them that discretionary commission arrangements (DCAs) will be banned within weeks. Lenders have been told they must cease the practice, which has already triggered a massive redress demand in the UK.

The letter suggests the practice, which is seen as damaging to consumers including by creating a potential conflict of interest whereby a sale agent’s commission improves when the car buyer’s terms worsen, is not currently outlawed here.

A copy of the warning has been posted on the Central Bank’s website.

DCAs are agreements in which a lender such as a bank or credit fund grants a credit broker – in many ­cases working in a car sales forecourt – ­authority or discretion to determine the interest rate offered to a car buyer.

The commission paid to the broker by the lender is then linked to the interest rate charged – so the higher rate the car buyer pays, the greater commission is paid to the broker.

In the UK, the Financial Conduct Authority (FCA), a regulator, banned DCAs in the motor-finance market in 2021.

Loan providers there, including major banks, are facing a huge wave of compensation claims, estimated at a combined £1bn (€1.2bn), dating back to before the practice was banned outright.

The Central Bank, whose governor is Gabriel Makhlouf, has now told the industry that it will effectively ban the practice in Ireland from this summer.

The letter said the regulator here will extend existing consumer protections to account for issues raised by DCAs, which means they will effectively be banned no later than July 31, 2024.

It was sent by Wesley Murphy, head of consumer protection supervision: credit and lending, at the Central Bank of Ireland.

“Where we identify practices that are not in line with our expectations, we review the practice and intervene as appropriate within the context of our statutory mandate,” the letter said.

“The Central Bank is not satisfied that DCAs, and in particular the incentives they create for credit intermediaries to apply a higher interest rate in order to increase the amount of commission received, are consistent with the market outcomes that Provision 3.25A seeks to achieve.”

In a letter dated June 12, executives are told that a review by the regulator found DCAs are a feature of the market here and ordered each firm to stop it and to confirm that a review of each firm’s disclosure on commission to customers will be undertaken in accordance no later than August 30, 2024.

The outcome of this review is to be provided to the Central Bank, by September 30 this year.