For a report that specifically excludes motor finance, the recent Financial Conduct Authority report ‘Impact of credit broking remuneration models at the point of sale’ is surprisingly relevant for the sector. It’s also important to those involved in asset finance broking.
The report is mainly about retail point of sale finance that is offered on sofas, cameras and such like. In that sector the retailer, as the credit broker, often isn’t remunerated at all for their work. Instead, they pay the lender by subsidising 0% or other special finance deals. It is hardly surprising then that the FCA didn’t find any major concerns with commissions and most customers surveyed were happy.
The report gets more interesting towards the end, when the FCA moves to look at specialist brokers.
Here the FCA explains the ‘increasing difference in charges’ (DiC) broker commission model, stating - rather bluntly - that “the more interest the customer is charged, the more commission the broker will earn”.
The report notes that the DiC model is being considered as part of the ongoing motor finance review. That review was due to be completed this month, but today the FCA says only that the findings will be out “later this year”.
Although DiC appears to incentivise brokers to charge customers more, the market usually stops this happening.
Lenders typically cap overall rates, and in the competitive motor and commercial finance markets brokers are usually ‘price-takers’ rather than ‘price-makers’.
If there are any residual concerns, a proportionate response from the FCA would be to recognise those factors and issue only some principles-based guidance.
Yet there are clues today that the FCA may intend to take a firmer line when it does finalise its motor finance findings.
The description of DIC contrasts starkly with the FCA’s March update on its motor finance review.
Then, the regulator provided a far more nuanced view of DiC by noting that “without appropriate systems and controls, [DiC] structures could provide incentives for dealers to arrange finance at higher interest rates”.
Today’s report also includes a case study of a broker that selected the funder they used based on the amount of commission they would earn.
The FCA states that: “It is a breach of our roles to give preference to the products of one lender because they pay more commission rather than being in the best interests of the customer”.
The accuracy of this statement, with its clear implication that selecting the lender who pays more commission is against the best interests of the customer, is debateable.
The full FCA rule on this states that firms must not “secure credit for a customer at a higher rate of interest than was requested, where the object of doing so is for, or can reasonably be concluded as having been for, the personal gain of the firm or of a person acting on its behalf, rather than in the best interests of the customer”.
Let’s put aside the part of this about the rate that was requested (since when do most customers request rates?) the key question here is whether a broker choosing the lender that pays more commission “can reasonably be concluded” to be acting against the best interests of the customer.
It shouldn’t be, as in a competitive market the price paid by the customer is simply the market rate. The commission the broker earns is mostly about the share of margin between broker and lender.
So, why shouldn’t a broker select the lender that offers them the best deal? Isn’t that just an example of how an efficient market works?
Possibly this is reading too much into just a short section of today’s (unusually concise) FCA report.
Yet the FCA’s review of motor finance has been high profile, and we should expect the regulator to be looking for bold ways to protect consumers. Based on the language in today’s report, DiC appears to be firmly in the FCA’s spotlight.
If DiC was to be outlawed, would that result in better outcomes for motor finance customers, or businesses using asset finance brokers?
That’s really not at all clear, whether in terms of prices paid for finance sold in car dealerships or the continued availability of expert support from independent asset finance brokers.
For more background on motor finance, please see my new Used Car Finance report for Apex Insight.
* Julian Rose is director of consultancy at Asset Finance Policy. He is author of the A to Z of Asset Finance and Leasing and of a range of Apex Insight consumer credit market reports, including a new report on the used car finance market.