The UK’s Financial Conduct Authority (FCA) has confirmed it is set to ban motor finance commission models that offer incentives to dealers and brokers to set higher interest rates.
The ban will refer to commission models in the motor finance market where the amount of commission the broker receives is linked to the interest rate paid by the customer where the broker has the authority to set and adjust said rate.
It follows a review into the market conducted in early 2019 and a period of consultation at the end of last year however due to the disruption caused by the coronavirus pandemic, it won’t come into force until 28th January 2021.
The FCA said it expects brokers to negotiate alternative commission models themselves and would not be specifying which models they should use going forward. Alternative commission models could include risk-based pricing providing the broker was not incentivised to adjust the rate or flat-fee models.
The regulator expects the ban to increase competition and protect customers, saving motor finance consumers around £165 million.
Work to monitor how well firms are complying with the ban will begin in September 2021 with the FCA saying they will examine the alternative models being used as well as the interest rates and commission earned. They also revealed that they are planning a point-of-sale mystery shopping exercise to measure lenders control over dealer networks.
It’s not just the motor finance industry that is facing changes with the FCA set to change its rules and guidance on the disclosure of commission arrangements for lenders across all consumer credit sectors. The changes are set to help consumers receive appropriate information on commission and how it impacts the amount they pay. These changes are also set to come into effect in January 2021.
The current discretionary finance rates offered by some car dealers and brokers act as an incentive to sell more expensive credit to customers as a result of the commission earned on the sale, according to the FCA. The FCA found that this system in some cases can act as an incentive for brokers to “act against customers’ interests”.
The new ban will remove the financial incentive for brokers to increase interest rates, offering lenders more control over the rates consumers pay for their car finance.