The Financial Conduct Authority (FCA) has announced that it 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 the changes would save customers £165 million a year.

Preventing the use of this type of commission would 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.

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 that they receive more relevant information. These changes would apply to many types of credit brokers and not just those selling motor finance.

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

Commenting on the Financial Conduct Authority announcement 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.”

James Fairclough, CEO of AA Cars, said “Finance providers have done an excellent job of offering customers a wide and flexible range of products designed to make buying and running a car easier. But too often customers are not presented with the full range of options, meaning they may miss out on good deals or pay more than they should.”

“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.”

“The FCA’s proposal should improve consumer choice and transparency, and we support their efforts to make car finance work better.”

Scott Cargill, UK CEO of Admiral Financial Services said “The announcement from the FCA today will be welcome news to anyone buying a car from a dealership. For far too long, there has been a lack of transparency around how some car dealers make commission on sales. This has resulted in some customers overpaying for their loans by millions of pounds a year, but not really having any real idea by how much.”

“Now the FCA has shone a light on some of the shady ways commission is made, we expect to see more competition in the market and better deals for consumers.”

“Car buyers need to know that they don’t have to pay these big commissions and do have the option of taking out car finance directly from other lenders – potentially saving thousands of pounds in interest. The car finance industry has been slow to catch up with other sectors and this has been to the detriment of the car buying public.”

“The proposed changes should mean that customers know exactly what they’re signing up for in terms of what the product is, the interest rates and total amount payable. They will be able to make an educated decision on their car finance, and potentially save money.”

MotoNovo Finance CEO Mark Standish said “The FCA’s announcement on dealer finance points to fundamental changes in the commission model, with a dealer’s capacity to set customer interest rates to be banned. It’s exactly what we predicted back in March; where we thought that significant change was likely and now see this as a unique opportunity for the dealer sales and financing model to reinvent itself, making it both trusted by, and relevant to, today’s highly informed and protected car buyer.  Rather than achieving used car finance penetration of as low as 20%, let’s use the opportunity to aim higher and ensure the dealer, both physically and digitally, is vital to the used car buying and financing journey.”

“Addressing the issues (highlighted in the in the Final Findings report) can help create lower interest rates in dealer marketing and enable appropriate rate-for-risk pricing to be developed, vital when finance and car buying are so connected today and when increasing finance competition and online pricing transparency are prevalent.”

“There is no place for trying to side-step the FCA’s stated intention to address consumer harm and drive savings for customers and our response needs to be a bold one. Dealer finance has to reinvent itself and become an accessible, transparent, affordable, fair and trusted by today’s car buyers. Removing dealers’ ability to set interest rates, which has come in for so much scrutiny, does this at a stroke. As an industry, we need to embrace positive change and move on confidently, building new partnerships with its customers.”

Used vehicle dealer finance can become far more important for dealers. To realise this ambition, the industry must re-boot. At the heart of our approach to support dealers in doing the right thing, we are already rolling out our Triple Win approach. This champions a financing philosophy that works for car buyers, dealers and ourselves. It is designed to drive used car finance up and place used car financing and sales together.

“By delivering change effectively, dealers will be able to improve finance penetrations through a more customer focussed culture where lower customer interest rates are achievable.  It is timed perfectly for the FCA announcement.”

Edward Flanagan, Partner at Corclaim Debt said “Many car dealers and finance providers are finding themselves subject to greater regulatory scrutiny. The FCA has investigated the automotive finance industry and whilst it was anticipated PCP would be viewed as a questionable product this has not turned out to be the case. What does concern the FCA is the manner in which dealers, brokers and finance companies engage with customers. One only has to look at the case of Lookers the large UK dealer group. This business has notified the FCA that they have some concerns around their historic selling practices. The impact on the business was profound reducing the share price by 50%. Further it is unknown what the financial consequence, if any, will be for Lookers.”
“Against this increasing regulatory narrative we see the arrival this December of the Senior Managers Regime, whereby senior managers who turn a blind eye to matters may themselves be personally liable to actions or sanctions for breaches of regulatory requirements.”