FCA acts to address unclarity

The Financial Conduct Authority (FCA) is considering changes to the way in which commission works in the motor finance sector and has uncovered “serious concerns” about the way in which lenders are choosing to reward car retailers and other credit brokers. The findings form part of the final report of the FCA’s work on motor finance published on the 04/03/2019 and you can obtain a copy of the final report on the FCA website at www.fca.org.uk or click on the link below:


The FCA’s immediate concerns are the “widespread use” of commission models which allow brokers discretion to set the customer interest rate and thus earn higher commission, can lead to conflicts of interest which are not controlled adequately by lenders. This can lead to customers paying significantly more for their motor finance. It suspects these could be costing consumers £300m more annually when compared against a baseline of flat fee models.

“We estimate that on a typical motor finance agreement of £10,000, higher broker commission under the Reducing DiC (difference in charges) model can result in the customer paying around £1,100 more in interest charges over the four-year term of the agreement,” said the FCA.

It found that there is typically little link between a customer’s interest rate under DiC and their credit score, because the rate is instead being determined by a broker’s ability to earn commission. The FCA is assessing the options for intervening in the market, which would address the harm it has identified. This could include strengthening existing FCA rules or other steps such as banning certain types of commission model or limiting broker discretion. The FCA has said the onus is on a lender to show that any differences in commission rates are justified, based on the work involved for the broker.

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 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 FCA has been carrying out mystery shopping on dealers and found that dealers in some cases were not giving customers enough information to enable informed decisions. The FCA also said it was not satisfied that all lenders were complying with the rules on assessing creditworthiness including affordability. The FCA said it would follow up with individual firms where failures were identified. It said it expects all firms, both lenders and brokers, to review their policies, procedures and controls to ensure they are complying with all relevant regulatory requirements and are treating customers fairly.

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