FCA announces a ban on discretionary finance commission models

The Financial Conduct Authority (FCA) has announced that it will ban car retailers’ discretionary finance commission model.

The current system allows the broker to set the rate, and the FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests.

It estimates the changes would save customers £165m a year.

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.

The FCA is consulting on the new rules until 15 January 2020 and plans to publish final rules later in 2020.

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.”

Sue Robinson, NFDA Director, said: “Franchised vehicle retailers are committed to helping and providing clarity to the consumer.

“Clear rules are positive for the industry but we would urge that they are proportionate so there is a satisfactory outcome for both consumers and retailers.

“NFDA will be responding in depth to the consultation.”

Adrian Dally, head of motor finance at the FLA, sees the FCA’s announcement as a positive for the motor finance sector: “Today’s announcement is good news for the industry and consumers, as it delivers clear rules and a consistent approach to commissions.

“Many lenders have already moved to the commission models that the FCA is proposing.”

Dally also commented that this announcement is not really news, as the FCA outlined they would be changing the rules around commission models earlier in the year, which is exactly what has been done.

James Fairclough, CEO of AA Cars, concluded:  “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.

“The FCA’s proposal should improve consumer choice and transparency, and we support their efforts to make car finance work better.”