FCA Confirms Ban on Motor Finance Discretionary Commission; Effective January 2021

Following an October open consultation, the Financial Conduct Authority is set to ban discretionary commission models used by car brokers to adjust customers’ interest rates, the FCA announced in a press release on Tuesday. The ban, expected to save customers £165 million annually, will take effect on 28 January 2021 to allow companies time to implement the new rules.

The ban on discretionary commission models, where brokers are “rewarded” for charging customers higher interest rates, will protect consumers and “increase competition,“ according to Christopher Woolard, the Interim Chief Executive at FCA.

The FCA has also finalised its changes to the Consumer Credit sourcebook (CONC) to ensure the rules are explicit when it comes to informing customers about the commission they are paying. These reforms don’t just apply to the motor finance sector, but also to other types of credit brokers as well. These changes will also be implemented on 28 January 2021.

The specifics of the ban on motor finance discretionary commission models and the reforms to the CONC regarding disclosures of such commission are outlined in FCA’s recently published Policy Statement 20-8 (PS20/8).

Adrian Dally, Head of Motor Finance at the Finance & Leasing Association (FLA), commented that FCA’s move is “a welcome announcement” because it “provides clarity” for the industry. He also expressed that they are “pleased that the regulator accepted [their] point about the need to monitor the consumer hire market” considering that the ban doesn’t extend to personal contract hire agreements.

The British Vehicle Rental & Leasing Association (BVRLA) expressed satisfaction that the sector has been provided “sufficient notice” to prepare for the upcoming changes, noting that its members will require time to negotiate contracts and implement system adjustments.

Representing the National Franchised Dealers Association (NFDA), Director Sue Robinson also expressed approval that the regulator opted for a six-month implementation period, rather than the initially proposed three months, aligning with the association’s previous lobbying efforts.

Ban on Discretionary Commission Models

The FCA has conducted thorough research into the motor finance sector, and found out that discretionary commission models have resulted in higher finance costs for customers. Existing practices of some motor finance brokers and car retailers include having the freedom to set the customers’ interest rates, and receiving commissions based on them, creating an incentive to inflate rates for higher payouts.

The ban on discretionary commission models will remove the financial incentive for brokers, and will also give lenders more control in setting the amounts the customers will have to pay for motor finance, the FCA explained.

Clarifying Commission Disclosure in Consumer Credit Market

The FCA said that the changes to the CONC with regards to the commission disclosure are “relatively minor” and intended to be “low cost” while improving the companies’ existing practices.

The following are the reforms to the CONC:

• CONC 3.7.4G is changed to clarify that companies must explain the type of commission in their ads and when giving recommendations. Companies should think about how commission affects a customer’s decision to buy and how much it can change based on the lender, product, or other factors, and adjust their disclosures accordingly.
• CONC 4.5.3R states that companies must always clearly disclose the “existence and nature” of commission that varies based on the lender, product or other factors. They must also explain how this could impact the price the customer pays.

These changes should provide the consumers with a more well-informed decision on their motor finance options, the regulator explained.

Next Steps for FCA

The FCA has warned that it will be monitoring the car finance sector for companies attempting to introduce a commission scheme that results in similar harm to the consumers that the organisation sought to curtail.

The Authority also plans to conduct supervisory work on a sample of companies to assess their compliance with the ban on discretionary commission models. This will commence in September 2021.

A point-of-sale mystery shop exercise will also be carried out to measure the lender’s control across the dealer networks, the Regulator further discussed.

The FCA will check in 2023/24 to see if their changes are working as planned and if they need to make any other changes.

Results of Open Consultation 

In October 2019, the FCA published  Consultation Paper 19-28 (CP19-28) and sought feedback on its proposal to address the harm to the consumers caused by the widespread use of discretionary commission models in the motor finance industry. The Authority also sought feedback on their proposed reforms to the CONC to clarify the guidance and rules on the disclosure of commission arrangements with lenders.

Trade associations, motor finance brokers and lenders, consumer groups, and even companies in other credit markets responded to FCA’s call. In general, they supported, or at least accepted, the FCA’s proposals.

Some of the non-confidential respondents include the following:

• British Insurance Brokers’ Association
• British Vehicle Rental and Leasing Association
• Finance and Leasing Association
• Financial Services Consumer Panel
• National Franchised Dealers Association
• Smaller Business Practitioner Panel
• The Consumer Council for Northern Ireland
• The National Association of Commercial Finance Brokers
• Volkswagen Financial Services (UK) Ltd

The majority of companies acknowledged that discretionary commission models were detrimental, while consumer groups supported the proposed ban, the FCA relates.

Although opinions differ on whether the ban is the right course of action, the FCA noted that most of the largest brokers and lenders, and their trade associations, concurred with the proposal.

FCA’s Crackdown on Car Finance Commission

Since 2017, the FCA has been looking into the concerns over the commission issue in the motor finance sector, as outlined in its Business Plan 17/18.

In March 2018, the regulator provided an update report over its work in motor finance, and published its final findings in March 2019. Among others, the authority discovered the widespread practice of tying commission to interest rates that often resulted in unfair deals for the customers. It was also found that there’s a high level of non-compliance with current commission disclosure requirements.

On 15 October 2019, the FCA sought feedback on CP19-28 where it outlined its proposed ban on motor finance discretionary commission models, and proposed reforms to the CONC related to commission disclosure.

The Financial Conduct Authority, a financial regulatory body that operates independently of the UK Government, oversees around 42,000 businesses with the operational objectives to support and enhance the integrity of the finance market, foster healthy competition, and protect consumers.