Credit, Collections & Insolvency News
The Financial Conduct Authority (FCA) is considering changes to the way in which commission works in the motor finance sector after uncovering serious concerns about the way in which lenders are choosing to reward car retailers and other credit brokers. The findings form part of the final report of the FCA’s work on motor finance published today (4th March 2019)
The FCA found that the widespread use of commission models which allow brokers discretion to set the customer interest rate and thus earn higher commission, can lead to conflicts of interest which are not controlled adequately by lenders. This can lead to customers paying significantly more for their motor finance.
The FCA is assessing the options for intervening in the market which would address the harm it has identified. This could include strengthening existing FCA rules or other steps such as banning certain types of commission model or limiting broker discretion.
Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA said “We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves. We estimate this could be costing consumers £300m annually. This is unacceptable and we will act to address harm caused by this business model.”
“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.”
As part of its work the FCA also carried out mystery shopping of firms. The FCA found that where disclosures were given, these were not always complete, clear or easy to understand and as a result customers may not be given enough information to enable informed decisions. The FCA was also not satisfied that all lenders were complying with the rules on assessing creditworthiness including affordability.
The FCA will follow up with individual firms where failures were identified but expects all firms, both lenders and brokers, to review their policies, procedures and controls to ensure they are complying with all relevant regulatory requirements and are treating customers fairly.
Commenting on the findings from the FCA regarding the motor finance market, Scott Cargill, CEO of Admiral Car Finance said “For too long, many unsuspecting customers have been overcharged in certain sectors of the car finance market. The FCA has found this to be as much as £300 million annually. It’s good news for consumers the FCA is taking this issue so seriously. Car buyers need to know that they can avoid paying big commissions by taking car finance products directly from other lenders – potentially saving thousands of pounds in interest. The car finance industry has been slow to move away from outdated introducer commission models. Customers should be encouraged to look beyond just the car finance monthly repayment. We’d urge car buyers do their research and compare overall car finance costs and features before they sign on the dotted line.”
British Vehicle Rental & Leasing Association (BVRLA)’s Chief Executive, Gerry Keaney said “The FCA has been working on this report for two years and has issued plenty of guidance and recommendations during that period,”
“Over the same period, the BVRLA and its members have taken a close look at our own industry guidance and best practice, supporting these with a comprehensive training and inspection programme.”
“The time for excuses has passed. There is no place in the motor finance sector for companies that are unwilling to embrace the FCA regime and actively demonstrate their compliance.”
“The BVRLA has more than 340 motor finance brokers in membership, who embrace our mandatory code of conduct and governance regime. We would like to see more lenders working with us to improve industry standards and processes.”
Stephen Dawson, Head of Shoosmiths’ Financial Services sector group, said “Perhaps unsurprisingly, the core themes highlighted by the FCA as troublesome are around (i) commissions (ii) sufficient, timely and transparent information, (iii) affordability assessments, with lender controls being pervasive across each of those areas.
“We have seen a lot of work going in across the industry, including lenders and brokers, to address many of the issues raised in the Final Findings.”
“Our own view is that the market has moved very far in the last 12 – 18 months, and a lot of work is ongoing,” Dawson comments. “It is disappointing that the lenders who have responded positively to FCA guidance, and new rules, find that the market is being led towards much stricter governance because of a broader failure in parts of the market.”
“In the immediate aftermath of the report coming out, it is perhaps worth motor finance businesses taking careful note of the issues identified, and deciding which of the issues are directly relevant to your business. Speak to your advisors, and particularly those ones who have a broad view of the market (including lender and broker activity).”
Jane Tully, director of external affairs at the Money Advice Trust said “The FCA has rightly thrown a spotlight on motor finance and we welcome in particular the regulator’s commitment to remind firms of requirements around assessing affordability.”
“We should remember that car finance deals are a popular way to access a car that may otherwise be difficult to obtain. However, it is crucial that firms fully assess consumers’ affordability and that consumers are clear on the terms they are signing up to at the outset.
“It is also important that firms consider their responsibility to customers that may be in vulnerable circumstances and ensure they have the appropriate processes in place to identify and support them – through all of the channels available to them, including through dealerships.”