The UK’s Financial Conduct Authority will ban discretionary commission models from 2021 to end incentives for motor finance brokers and dealers to increase customers’ finance costs.
It is also changing its rules to make sure credit brokers give consumers more information about commission levels and structures.
The ruling follows a consultation by the FCA in October last year that found commission for some car retailers was linked to the level of interest charged, which created an incentive to sell more expensive credit.
The FCA estimates the changes can save customers £165 million a year when the car finance market returns to normal. However, in the light of the disruption caused by the Coronavirus pandemic, the ban will not be implemented until January 28, 2021 to give the industry time to adapt.
The FCA said that the move will give lenders more control over the prices customers pay for their motor finance.
Christopher Woolard (pictured), the FCA’s interim chief executive, said: “'By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”
The disclosure changes apply to many types of credit brokers and not just those selling motor finance.
In a statement, the FCA said it would continue to monitor the market and “look closely at any attempt by a motor finance firm to introduce a commission model that could lead to the same harm that we have sought to ban”.
It will also monitor the market to review compliance with the ban and carry out point-of-sale mystery shopping exercises to measure lenders’ control over dealer networks.
A full market review of the intervention will be launched in 2023/24.
The move was welcomed by the Finance and Leasing Association.
Adrian Dally, head of motor finance at the FLA said: “This 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.”
In its policy statement, the FCA acknowledged that many brokers, lenders and their trade bodies were concerned that the ban would not apply to consumer hire agreements – such as personal contract hire.
They argued that this could be exploited by companies already operating in that market and could even incentivise some to move away from hire purchase, including personal contract purchase (PCP), towards PCH.
There were also concerns this could give consumers fewer protections, for example because PCH doesn’t require companies to carry out an affordability assessment.
In response, the FCA said it would monitor the situation and warned: “If we have evidence that similar commission models exist in the consumer hire market and are leading to harm, we will look at how to act.”
You can download a full copy of the FCA's policy statement here: https://www.fca.org.uk/publication/policy/ps20-8.pdf