The Financial Conduct Authority (FCA) has revealed its “serious concerns” over the commission arrangements which exist in the motor finance sector.

One of the main issues is that many brokers have discretion to set the interest rate on a finance agreement. Under Difference in Charges arrangements, the broker commission is linked to the interest rate, which could lead to a conflict of interest for lenders, who would then have an incentive to seek out the deals paying the highest commission.

The regulator has estimated that, as a result of the higher interest payments, consumers could be paying an extra £300 million per year. It has come to this conclusion after reviewing a sample of 1,000 finance agreements from 20 lenders who collectively represent around 60% of the market.

The FCA will now consider whether to intervene in this sector – they could for example introduce new rules, ban the payment of certain types of commission or impose limits on the ability of brokers to set interest rates. In any case, the FCA’s report points out that, even under existing rules, the onus is on motor finance lenders to show that any differences in commission rates are justified, based on the work involved for the broker.

The regulator has also said it is concerned about some other practices within the motor finance sector, including:

  • Inadequate assessments of creditworthiness and affordability. The FCA says it has observed that, whilst arrears and default rates remain relatively low, there has been an increase in this regard, particularly for higher credit risk consumers. This increase in arrears and default rates would not normally have been expected to occur during the period of relatively benign credit and macro-economic conditions we have experienced recently
  • Failing to disclose enough information to allow customers to make a fully informed choice on whether to proceed with a particular finance agreement

Existing FCA rules require that pre-contract disclosure must include key details of the credit and its cost, including the total amount payable, the interest rate, APR, default charges and any other costs. In the case of hire purchase agreements, firms must also disclose the cost of acquiring ownership of the vehicle at the end of the agreement, and the cash price of the vehicle.

Current rules also state that brokers must prominently disclose the amount of commission if knowledge of the existence or amount of the commission could affect the broker’s impartiality in recommending a particular product; or have a material impact on the customer’s decision when choosing a finance agreement.

The regulator’s review of the sector included: a survey of 20 motor finance providers, an analysis of loan data from a larger number of firms and a mystery shopping exercise.

Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, said:

“We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves. We estimate this could be costing consumers £300 million annually. This is unacceptable and we will act to address harm caused by this business model.

“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments.  This is simply not good enough and we expect firms to review their operations to address our concerns.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article