Motor finance: FCA consults on discretionary commission models and consumer credit commission disclosure
On 15th October 2019 the FCA published Consultation Paper 19/28: Motor finance discretionary commission models and consumer credit commission disclosure (CP19/28). The Consultation Paper proposes plans to ban commission models that give motor finance brokers/dealers an incentive to raise customers’ interest rates. The FCA are also consulting on minor changes to some of their rules and guidance to ensure that many types of credit broker give consumers more relevant information about commission.
The key features of CP19/28 are as follows:
The FCA is proposing a ban on commission models where the amount received by the broker (including motor dealers) is linked to the interest rate that the customer pays and which the broker has the power to set or adjust. The FCA refers to these as ‘discretionary commission models’ and has found in earlier reports that these models give rise to conflicts of interest and creates strong incentives for brokers to increase the interest rate paid by their customers to earn more commission. This will affect agreements where, essentially, the interest rate payable by the customer is linked to the commission earned by the broker.
The most common examples of discretionary commission models in the motor finance market are:
- Increasing Difference in Charges (DiC), also known as ‘Interest Rate Upward Adjustment’. In this model, brokers are paid a fee which is linked to the interest rate payable by the customer. The contract between the lender and the broker sets a minimum interest rate, and the fee is a proportion of the difference in interest charges between the actual interest rate and the minimum interest rate;
- Reducing Difference in Charges DiC, also known as ‘Interest Rate Downward Adjustment’. This is similar to Increasing DiC, except that the contract between the lender and the broker sets a maximum interest rate; and
- Scaled commission models, also known as a variable product fee. The broker is paid a fee which varies (within parameters) according to the interest rate.
Proposed changes to CONC:
To avoid narrow interpretation being taken, the FCA sets out further proposals to clarify the Consumer Credit sourcebook (CONC) provisions concerning commission disclosure. This is to better reflect the FCA’s intention that customers receive more relevant information about the existence of commission.
These clarifications would apply to all credit broking, not just in the motor finance market. The proposed change to CONC 4.5.3R also applies to consumer hire brokers by virtue of the application of CONC 4.5.
In the draft rules at Appendix 1, 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 consultation period ends on 15th January 2020 and the FCA expects to introduce new rules later that year. At this stage no immediate changes are required however if these draft rules are adopted in 2020, credit brokers will need to be prepared to make changes to their disclosure material and, for credit agreements and financial promotions.
While the FCA’s intention to ban discretionary arrangements is significant, the changes and impact on the CONC requirements specifically disclosure cannot be ignored. Firms will need to fully understand the rules and be able to evidence that that have provided the information to the customer. Information must be provided in good time, allowing the customer to make an informed decision. We have a mechanism that will allow you to prove compliance.
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