FOLLOWING consultation last October, the Financial Conduct Authority said it will introduce a ban on motor finance discretionary commission models from next January.
Currently, some car retailers and motor finance brokers receive commission linked to the interest rate that customers pay – creating an incentive to sell more expensive credit to some customers.
Brokers 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 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.
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 28 January 2021.
Sue Robinson, Director of the National Franchised Dealers Association said the six-month implementation period for the ban was an improvement on the originally proposed 3-month and in line with the NFDA’s previous lobbying calls.
She added: “Franchised dealers are committed to providing clarity to their customers and NFDA supports appropriate measures that are of benefit to consumers.
“We will now be looking at the policy statement in detail to understand the full implications for the sector and continue to liaise with FCA and our franchised dealer members going forward”.
Adrian Dally, Head of Motor Finance at the Finance and Leasing Association 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.”