NEW rules to ban commission linked to the interest rate that customers pay on motor finance products could be put into operation next year.
Some finance brokers currently receive commission linked to the interest rate that customers pay. Brokers can set that rate but the Financial Conduct Authority has found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests.
The FCA estimates that its planned changes could save customers £165 million a year by removing the financial incentive for brokers to increase the interest rate a customer pays and give lenders more control over the prices customers pay for their motor finance.
However, since the FCA announced earlier this year it would investigate the market, the proportion of finance sold using a discretionary commission model is declining according to members of the Leasing Broker Federation.
The new rules are expected to be announced next spring after the FCA has finished its consultation on the subject on 15 January 2020 with the rules coming into force a further three months later.
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.”
James Fairclough, Chief Executive of AA Cars,said that finance providers had done an “excellent job” of offering customers a wide and flexible range of products designed to make buying and running a car easier.
He added: “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.”
