FCA bans discretionary commission in car finance

The Financial Conduct Authority (FCA) has confirmed it is to ban the use of discretionary commission models in the car finance market, saying this will save customers £165m a year

Currently, some car retailers and motor finance brokers receive commission which is linked to the interest rate that customers pay, which the regulator says creates an incentive to sell more expensive credit to some customers, and is against their interests by raising finance costs.

The FCA consulted on the issues in October 2019, and in the light of consultation feedback and the additional operational pressures which the sector is facing at present it 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.’

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.

The FCA says it will look closely at any attempt by a motor finance firm to introduce a commission model that could lead to the same harm that it has sought to ban.

It plans to monitor how well firms comply with the ban on discretionary commission models by carrying out supervisory work across a sample of firms. This work will start in September 2021.

The FCA will also carry out a point-of-sale mystery shop exercise to measure lenders’ control over dealer networks, and will review its intervention in 2023/24.

Motor finance discretionary commission models and consumer credit commission disclosure – feedback on CP19/28 and final rules.

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