The Financial Conduct Authority (FCA) has set out plans to ban discretionary commission models used by some car retailers and brokers in the motor finance market.
Increasing Difference in Charges (DiC), Reducing DiC and Scaled commission models were highlighted in the FCA’s review of the motor finance industry earlier this year as a “serious concern” for the market.
The regulator said that such commission structures “creates an incentive for brokers to act against customers’ interests”. By preventing the use of this type of commission, the FCA is seeking to 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.
“We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance,” said Christopher Woolard, executive director of strategy and competition at the FCA. “By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”
By implementing the bans, the FCA hopes to save customers £165m a year and help them to make better informed decisions, consider alternative options, find a cheaper deal or negotiate on the finance or other costs associated with the deal.
The FCA is also proposing to make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These changes would apply to many types of credit brokers and not just those selling motor finance.
In the new proposals, firms would be required to disclose the nature of commission in their financial promotions and when making a recommendation. Guidance clarifies that firms should 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.
The FCA is consulting on the new rules until 15 January 2020 and plans to publish final rules later in 2020.
Adrian Dally, head of motor finance at the FLA, 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, National Franchised Dealers Association (NFDA) director, 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, said: “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.
“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.”
Sean Kulan, consumer credit sector lead at regulatory consultancy firm Huntswood, added: “The FCA has made it clear that they are going to take strong action against unfair pricing models, and this will likely be the first of several remedies implemented across the industry. Providers should look to minimise the potential for consumer harm by reviewing their current systems and controls, taking proactive steps to address any historic issues to ensure both compliance and good customer outcomes.”
Ian Mason, head of financial services at legal firm Gowling WLG, said: “The FCA is proposing to ban car dealers and brokers from charging a discretionary commission, linked to the interest rate charged. In some deals, it was the case that the higher the interest rate charged, the more commission paid by the customer, so there was an incentive for the broker to set a high rate. There will also be increased transparency under the proposals, as firms will be required to disclose the nature of the commission charged in their marketing and promotional materials.”
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