The Financial Conduct Authority (FCA) is considering changes to the way in which commission works in the motor finance sector after uncovering 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 today.
The FCA found that 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.
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.
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 estimate this could be costing consumers £300 million annually. This is unacceptable and we will act to address harm caused by this business model.
'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.'
As part of its work the FCA also carried out mystery shopping of firms. The FCA found that where disclosures were given, these were not always complete, clear or easy to understand and as a result customers may not be given enough information to enable informed decisions. The FCA was also not satisfied that all lenders were complying with the rules on assessing creditworthiness including affordability.
The FCA will follow up with individual firms where failures were identified but 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.
Notes to editors
- Our work on motor finance – final findings[1]
- The FCA launched its review of the motor finance market in 2017. Full details of the review[2]
- On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this, it has 3 operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA[3].