‘Unintended consequences’ predicted as FCA launches crackdown on car financing

Time 9:20 am, October 15, 2019

BRITAIN’S financial watchdog has launched a crackdown on car financing that could see car retailers and brokers banned from charging commission linked to the interest rate that customers pay on loans to buy motors. 

The Financial Conduct Authority (FCA) said brokers can increase the interest rate charged to boost their commission, which ‘creates an incentive for brokers to act against customers’ interests’.

The FCA said it believes scrapping this discretionary commission would remove this potential conflict of interest and give lenders more control over the prices customers pay for their motor finance, which would save drivers around £165m a year.

Christopher Woolard, executive director of strategy and competition at the FCA, said: ‘We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance.

‘By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.’

As reported by Car Dealer Magazine earlier this year, the FCA said it was considering commission changes after uncovering ‘serious concerns’ about lender rewards.

The conduct regulator will be consulting on the plans until January 15, with final rules set to be published later in 2020.

It launched its review of the motor finance market in 2017 amid concerns over some practices in the booming sector, which followed a surge in car financing agreements in the UK – from 1.2 million in 2008 to 2.3 million in 2017.

Mike Jones

These types of plans accounted for around 66 per cent of the value of all new and used car finance lending in 2017, up from 34 per cent in 2008.

The Bank of England has also raised the alarm over the rise in popularity of PCP plans, cautioning that it could leave consumers vulnerable.

Mike Jones, chairman of dealer profitability specialists ASE Global, told Car Dealer Magazine: ‘The announcement from the FCA that it proposes to ban the discretionary finance model is no surprise, given that it can easily be seen to provide an interest for the salesperson not to act in the customer’s best interest.

‘The majority of retailers have already moved away from the discretionary element, with higher interest only being charged where there is higher risk.

‘The other part of the consultation, which could cause some consternation, are the proposals to inform customers that they are earning a commission for arranging the finance. Whilst stopping short of requiring disclosure of the amount of the commission, unless the customer requests it, the mere fact that we will now see the prominent display of the fact that the dealer is earning commission will make many nervous.

‘This is, however, merely an extension of what we see in the sale of many other financial products. Handled properly, it can increase trust with the customer, and we have seen cases of finance sales increasing as a result of the transparency. Dealers will, however, have to refine their scripts over the next six months with the potential changes coming in.’

Sarah Nield, financial services risk and regulation director at PricewaterhouseCoopers, said: ‘Given the largest commissions received by brokers tend to come via the models set to be banned, it will be interesting to see how lenders, brokers and dealerships react.


‘Although we expect firms to comply with the spirit of the changes, it could result in unintended consequences, including increased flat-fee commission payments, car prices and bundled product costs.

‘While a number of lenders and brokers have already made positive changes in response to the FCA’s March report, tight implementation timeframes for these new rules may prove challenging and costly for some.’

National Franchised Dealers Association director Sue Robinson said: ‘Franchised vehicle retailers are committed to helping and providing clarity to the consumer. Clear rules are positive for the industry but we would urge that they are proportionate so there is a satisfactory outcome for both consumers and retailers. NFDA will be responding in depth to the consultation.’

James Fairclough, chief executive of AA Cars, commented: ‘The FCA has concluded, quite rightly, that there is no inherent problem with car finance products themselves. However, customers are poorly served if they are not shown all the options best suited to them, whether through a lack of transparency, deliberate misinformation or because brokers are trying to steer them toward a particular product purely in order to secure a discretionary commission.

‘Transparency and clarity are essential for the car finance industry to serve customers properly, and the FCA’s proposal would make it easier for car buyers to compare different deals and shop around.

‘It could also bring the price of finance down if it triggers greater competition on interest rates between lenders and removes the distorting effect of discretionary broker commission.’

Meanwhile, Adrian Dally, head of motor finance at the Finance & Leasing Assocation, said: ‘Today’s announcement is good news for the industry and consumers, as it delivers clear rules and a consistent approach to commissions. Many lenders have already moved to the commission models that the FCA is proposing.’

MORE: FCA considers commission changes after uncovering ‘serious concerns’ about lender rewards 

MORE: FCA outlines plan for motor finance review

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Car Dealer has been covering the motor trade since 2008 as both a print and digital publication. In 2020 the title went fully digital and now provides daily motoring updates on this website for the car industry. A digital magazine is published once a month.

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