8:16 am, July 28, 2020
A ban on car finance discretionary commission models is to be brought in from next year, the Financial Conduct Authority confirmed today.
It follows a consultation in October 2019, as reported by Car Dealer, and the watchdog estimates it will save customers £165m a year.
At the moment, some car retailers and motor finance brokers get commission linked to the interest rate paid by customers.
This, said the FCA, created an incentive to sell more expensive credit to some customers, as the broker could effectively set the interest rate, and the authority found that the widespread use of this type of commission created an incentive for brokers to act against customers’ interests.
Preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance.
Folliowing consultation feedback and the extra operational pressures faced by the sector at the moment, the FCA says firms can have limited extra time to bring in the new rules, with the ban coming into force on January 28, 2021.
Christopher Woolard, the FCA’s interim chief executive, said today (Jul 28): ‘By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.
‘We estimate that consumers could save £165m because of today’s action.’
The FCA will also change how customers are told about the commission they are paying to ensure they receive more relevant information.
These disclosure changes apply to other types of credit brokers as well, not just those selling motor finance, and will also come into force on January 28, 2021.
Mike Jones, chairman of dealer profitability specialist ASE Global, told Car Dealer: ‘The industry is currently working phenomenally hard to build trust with the consumer to ensure that everyone feels safe enough to buy a car in these uncertain times.
‘The majority of motor retailers had already moved away from these discretionary interest models, albeit the FCA clearly believes the implementation will save the consumer £165m.
‘I am pleased that the commission disclosure requirements have not been expanded and, handled correctly, this disclosure can increase transparency and trust.’
David Kendrick, head of corporate finance at the Manchester office of chartered accountants UHY Hacker Young, told us: ‘This announcement isn’t hugely surprising as it has been talked about for some time now.
‘Whilst the small print will need reading carefully, it appears that a fixed commission/fee model may have to be adopted by the dealers and brokers, which will be fully disclosed to the consumer.
‘The frustrating thing is that many dealers now operate with very specific interest rate bands, therefore perhaps they are now going to be penalised because of the actions of others who pushed customers into very high interest rate products historically, earning handsome commissions on the back of it.’
Adrian Dally, head of motor finance at the Finance and Leasing Association, said: ‘This is a welcome announcement from the FCA as it provides clarity for the industry. We are also pleased that the regulator accepted our point about the need to monitor the consumer hire market, as the ban on discretionary commissions does not extend to personal contract hire agreements.’
The FCA consulted on its plans until January of this year and is looking to hold a review in 2023/24.
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