Commission disclosure in consumer credit markets

The Financial Conduct Authority (FCA) has stressed the importance of transparency regarding consumer credit. The regulator published their final findings on motor finance back in March 2019 and their consultation paper on motor finance discretionary commission models and consumer credit commission disclosure in October 2019. These were prompted by a material rise in consumer credit, with the high volume of personal contract purchases (PCP) and a view to amend parts of the rules and guidance relating to the disclosure of commission arrangements with lenders.

The FCA wanted to understand the use of motor finance products, and to assess the sales processes employed by firms and whether the products could cause consumer harm. The FCA wishes to assess whether current sales processes ensure that customers are being treated fairly and whether lending firms are properly managing risk.
Customers expect financial services and products that meet their needs from firms they can trust. The FCA expect that the fair treatment of customers should be at the heart of your business and that you are able to demonstrate this.

Treating customers fairly is a requirement for all regulated firms, no matter their size or the nature of the activities they undertake. The way in which firms ensure that they meet that requirement should, however, be proportionate and relevant to their size and activities. Firms need to consider the fair treatment of customers throughout the entire customer journey – both before and after entering a contract. This again demonstrates the need to have the appropriate systems and controls in place to monitor whether the processes your business have established are successful and whether customers’ needs are being met. This should include adequate record keeping and monitoring to ensure compliance.

The FCA proposes new CONC guidance to clarify the need for firms to disclose the nature, not just the existence, of any commission arrangements to consumers e.g. how commission may vary due to a specific feature of a credit product. Further, firms must also disclose how a commission may affect the amount payable by a consumer.

Commission Transparency
Commissions payable by lenders to dealers are the least clear part of the car financing cycle. Indeed, they may not be referred to at all, as they do not necessarily have a direct impact on the customer. However, given the role that commission arrangements have had in PPI redress payments it is likely that the FCA will look for far greater transparency here.

The main concern is that certain incentive agreements can be structured in the dealer’s favour, heightening the risk of customer detriment and potentially leading to customers unknowingly paying higher interest rates. This contravenes the notion of treating customers fairly. Any proposed changes in this area may adversely affect the sales of new cars under PCP agreements, where the lender’s commission is used by the dealer to subsidise the car.

As with transparency of information, providing greater clarity over how commissions are paid to (and used by) dealers may not change current practices, but it would enable the customer to have greater insight when making purchasing and financing decisions.

Disclosure requirements
The information the FCA expect firms to disclose about commission is set out in CONC (Consumer Credit Sourcebook).
• CONC 3.7.4G states that, in the course of a financial promotion, communications with customers should indicate prominently the existence of any financial arrangements with a lender that might impact on the broker’s impartiality in promoting a credit product.
• CONC 4.5.3R requires brokers to disclose, in good time before a credit agreement is entered into, the existence of any commission or fee or other remuneration payable to the broker by a lender (or a third party) if knowledge of the existence or amount of the commission could actually or potentially:
– affect the broker’s impartiality in recommending a particular product; or
– have a material impact on the customer’s transactional decision
• Brokers are also required to disclose the likely or known amount of commission they receive, if the customer requests it (CONC 4.5.4R).

In 2018, the FCA carried out a mystery shopping exercise to understand how motor finance sales were being made in practice. This included looking at whether firms were providing customers with the right kind of information, at the right times, to enable them to make informed decisions.

The mystery shopping found that only a small number of brokers disclosed to the customer that a commission may be received for arranging finance. This was the case for only 1 out of 37 franchised retailers, 4 of 60 independent retailers, 2 of 14 car supermarkets and 4 of 11 online brokers.
Concerns are that consumers are not being provided with the right information about commissions at the right time. This can limit consumers’ ability to make informed decisions and, ultimately, choose the deal that is right for them.

The mystery shopping exercise showed that firms are interpreting commission disclosure provisions inconsistently. As a result, these disclosures, where made, are often not prominent nor early enough in the process to influence a customer’s decision making.

To avoid this narrow interpretation being taken, the FCA believe it would be helpful to clarify CONC 3.7.4G and 4.5.3R to better reflect their intention that customers receive more relevant information about the existence of commission.

The FCA are proposing that:
• CONC 3.7.4G is amended so it is clear that firms should disclose the nature of commission in their financial promotions (as well as when making a recommendation). Guidance clarifies that firms should consider the impact commission could have on a customer’s willingness to transact and that firms should consider whether and how much commission can vary depending on the lender, product or other permissible factors and tailor their disclosures accordingly.
• CONC 4.5.3R clarifies that the existence and nature of commission arrangements where the commission varies depending on the lender, product or other permissible factors should always be disclosed prominently. The disclosure must also cover how the arrangements could affect the price payable by the customer.

The FCA believe that clarifying the above CONC provisions will provide further benefits in this market. The FCA has made clear the importance of transparency regarding consumer credit and that brokers should review their policies and procedures to ensure they are complying with the CONC rules, treating customers fairly and taking steps to address any shortcomings.

Peak Consultants are well placed to assist your business and ensure compliance with the commission transparency along with the proposed changes to the CONC rules.
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