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The Financial Conduct Authority (FCA) is consulting on plans to ban the way in which some car retailers and other brokers in the motor finance sector receive commission.

Currently, some motor finance brokers receive commission which is linked to the interest rate that customers pay.  The broker can set that rate and the FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests.

The FCA estimates that changing this model would save customers £165 million a year by removing the financial incentive for brokers to increase the interest rate that a customer pays; lenders will also have more control over the prices customers pay for their motor finance.

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.’

The FCA is also proposing to make changes to the way in which customers are told about the commission they are paying to ensure they receive more relevant information. These changes would apply to a range of credit brokers and not just those selling motor finance.

The FCA is consulting on the new rules until January 15, 2020 and plans to publish final rules later next year.

The FCA said that a mystery shopping research exercise carried out last year found that just one out of 37 franchised retailers, four of 60 independent retailers, two of 14 car supermarkets and four of 11 online brokers communicated that a commission may be received for arranging finance.

It now proposes clarifying the CONC 3.7.4G and 4.5.3R rules regarding disclosure to ensure that firms consider “the impact commission could have on a customer’s willingness to transact and that firms should consider whether and how much commission can vary depending on the lender, product or other permissible factors and tailor their disclosures accordingly”.

Adrian Dally, head of motor finance at the FLA, welcomed the consultation.

He 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.”

Sue Robinson, director of the National Franchised Dealers Association, which represents franchised car and commercial vehicle retailers in the UK, 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”.

To view the FCA's review findings and details of how to participate in the ongoing consultation on the proposed regulatory changes, visit the consultation website.

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