The Financial Conduct Authority has announced that it will introduce a ban on discretionary commission models. The ban, follows a consultation in October 2019.
Currently, some car retailers and motor finance brokers receive a commission that is linked to the interest rate that customers pay – creating an incentive to sell more expensive credit to some customers.
The broker can effectively set the interest 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 change will 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.
In the light of consultation feedback and the additional operational pressures which the sector is facing at present the FCA has agreed to give firms limited additional time to implement the new rules, with the ban coming into force on 28 January 2021.
Christopher Woolard, 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.”
“We estimate that consumers could save £165 million because of today’s action.”
The FCA will also 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 disclosure changes apply to many types of credit brokers and not just those selling motor finance. These changes will also come into force on 28th January 2021.
Commenting on the FCA’s announcement, Adrian Dally, Head of Motor Finance at the FLA said “This is a welcome announcement from the FCA as it 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.”
Mark Standish CEO at MotoNovo said “The FCA’s intentions for change were well sign-posted and changes to both discretionary commission models and commission disclosure were expected and from our experience in launching MotoRate proactively should be welcomed by dealers. We have seen dealers using MotoRate increase used car finance penetration by 40 per cent, report higher levels of customer trust and enhanced chassis profit. Embracing the changes required can be the catalyst to grow dealer finance, notably in the used car space. We also need to be very public that we are already making positive changes to avoid the type of negative headlines such as ‘’Outrageous’ car loan commission banned’, that we have already seen on consumer media.”