The FCA is to go ahead with its previously announced plans to ban car finance commission arrangements where the level of commission can be set by the broker, although the changes will not now come into force until January. The regulator has also announced changes across the credit sector in the way firms will need to disclose commissions in financial promotions and other areas.
Following a previous consultation in October 2019, the Financial Conduct Authority has confirmed it is to go ahead with a ban on ‘discretionary commission’ models in the car finance sector.
These arrangements involve commission being linked to the interest rate that customers pay, thus creating an incentive to sell more expensive credit to some customers. One of the features of this type of arrangement is that the broker can effectively set the interest rate that the finance provider charges.
Quite simply, the FCA has now outlawed any form of commission arrangement where a broker is rewarded for adjusting the price a customer pays for motor finance. This includes arrangements where the broker can decide or negotiate any element in the total charge for credit and is remunerated on that basis, so the ban does not just apply where the broker might have influence over the interest rate.
The FCA believes that the changes will save consumers £165 million per year as there will no longer be a financial incentive for brokers to increase the interest rate that a customer pays; and lenders should have more control over the prices customers pay for their motor finance, which should lead to improved competition.
The new rules will not prevent firms from continuing to link loan commissions to the amount being borrowed, e.g. charging a percentage of the loan amount as commission.
Personal Contract Hire arrangements are not covered by the ban, but the FCA says it will act if it has evidence that similar commission models exist in the consumer hire market and are leading to harm.
Within the same Policy Statement, the FCA has also confirmed it is going ahead with two rule changes relating to commission disclosure. These changes will apply across the entire consumer credit sector and not just in motor finance firms.
Firstly, firms will be required to disclose the nature of any commission they will receive in their financial promotions, whereas previously they might only have disclosed this at point-of-sale.
Secondly, firms will also need to prominently disclose the existence and nature of a commission arrangement where the commission amount might vary depending on the lender, product or other pertinent factors. This disclosure must explain how the commission arrangements could affect the price payable by the customer.
The changes will come into force on January 28 2021, which is three months later than was originally proposed. Later in 2021, the regulator will carry out supervisory work and mystery shopping to ensure firms are complying with the new rules.
Christopher Woolard, the FCA’s Interim Chief Executive, said:
“By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”
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