The Financial Conduct Authority (FCA) has published the results of its thematic review into inter-firm commission in the credit broking sector. The regulator was examining whether the payment of commission to brokers by lenders was leading to significant consumer detriment.
Credit brokers can still be remunerated via commission, but this is not the case in all areas of financial services. Investment and pension advisers have for example been banned from receiving commission for a number of years now, largely because of fears that advisers could recommend a product and/or provider simply due to the level of commission they would receive as a result and would neglect issues such as whether that product was indeed the most suitable for their client.
This latest FCA review was wide-ranging and involved monitoring the activities of firms including: retailers selling goods on finance, online loan brokers, price comparison websites and commercial finance brokers. The regulator gathered data from some 349 firms, interviewed 32 firms and also spoke to 1,208 consumers who had recently made applications for credit. Motor finance brokers were not included in this study, as the FCA is conducting a separate review of their business practices.
The principal finding of the review is that there are no sector-wide issues of great significance, and across the sector as a whole, there is no evidence that payment of commission to brokers is leading to significant consumer harm. It did not find widespread evidence of finance brokers actively looking to negotiate higher commission rates with lenders, or to switch to lenders that provide higher commission. Where finance brokers earned commission and offered more than one finance product, their most frequently sold product was usually not the one that earned the highest commission.
The FCA did find some evidence though of consumers who may have ended up taking out unsuitable credit, or who felt pressured into taking out credit during their dealings with the broker. Despite the favourable overall findings, the FCA does add in the report:
“We did identify a small number of issues in individual firms and are addressing these with each firm.”
Just because the sector as a whole has received a favourable report does not mean that individual credit brokers can neglect the issue. In any area where advisers/salespeople, or the firm themselves, can receive commission by selling certain products, there is a potential for the commission structure to lead to inappropriate sales. Firms need to have robust systems in place for monitoring the suitability of products they arrange, and for managing the risk that individual advisers/salespeople might be motivated by earning commission rather than doing the best for their client. For example, some firms now base performance related pay on client satisfaction and the individual’s compliance standards, rather than their sales volume.
In the report setting out the findings of the review, the FCA notes that it currently supervises more than 30,000 credit brokers, which is more than the number of authorised firms in any other sector of the financial services industry. It also notes that its Financial Lives Survey showed that 75% of UK adults hold some form of regulated credit product.
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