Credit brokers, including car retailers and motor finance brokers, should be aware that the Financial Conduct Authority (FCA) ban on discretionary commission models for motor finance comes into effect on the 28th of January 2021.
This ban restricts arrangements where a commission, fee or other financial consideration is payable directly or indirectly by a lender to a broker in connection with a regulated credit agreement, and where this is wholly or partly affected by the interest rate (or other item within the total charge for credit) set or negotiated by the broker.
The FCA was concerned that the discretionary commission model prevalent in the market was leading to poor customer outcomes by incentivising the sale of more expensive credit agreements to increase the commission earnt by the broker.
Preventing the use of this type of commission is intended to remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance.
The FCA estimates the changes would save customers £165 million a year.
The announcement was made back in July of last year. Firms should have discontinued this model and renegotiated with the lender for a fixed commission rate. If your firm is still trading with discretionary commission rates, we would advise you to suspend this activity immediately and seek to change the model with the lender. Failure to comply with this ban can result in FCA sanctions such as a fine or revoking your firm’s authorisation to conduct regulated activity.
This discretionary commission model ban extends outside of motor finance. Therefore, all credit brokers whose commission varies depending on the customer’s interest rate should also seek to discontinue this model. The FCA has highlighted the motor finance sector specifically as the sector where the model was most prominent.
Firms should also be aware that the FCA has added further rules on how credit brokers disclose their commission to customers within the Consumer Credit Sourcebook (CONC). These rules will be enforced by the FCA once the ban has taken effect, for more information on these rule changes please see the FCA’s consultation paper by clicking the following link … Motor finance discretionary commission models and consumer credit commission disclosure.
Please note, there are certain permissible commission models and commercial arrangements which are not subject to the ban, including commissions linked to the size of the loan and interest rates varying by product type.
Could you be overcharging fees? Do you need to understand more about the fees and commissions you can earn? Most regulated industries such as Claims Management, Debt Management and Credit Broking have fee caps in place. If you need additional support and guidance on what you can and can’t charge for your service please contact us today. Call us on 0161 914 5727