The Financial Conduct Authority plans to ban the way in which some car retailers and brokers in the motor finance sector receive commission.
Currently, some motor finance brokers receive commission which is linked to the interest rate that customers pay. The broker can set that rate and the FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests. The FCA estimates the changes would save customers £165 million a year.
Preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA said, “We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance. By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”
The FCA is also proposing to make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These changes would apply to many types of credit brokers and not just those selling motor finance.
The FCA is consulting on the new rules until 15 January 2020 and plans to publish final rules later in 2020.
James Fairclough, CEO of AA Cars, said, “Finance providers have done an excellent job of offering customers a wide and flexible range of products designed to make buying and running a car easier.
“But too often customers are not presented with the full range of options, meaning they may miss out on good deals or pay more than they should.
“The FCA has concluded, quite rightly, that there is no inherent problem with car finance products themselves. However customers are poorly served if they are not shown all the options best suited to them, whether through a lack of transparency, deliberate misinformation or because brokers are trying to steer them toward a particular product purely in order to secure a discretionary commission.
“Transparency and clarity are essential for the car finance industry to serve customers properly, and the FCA’s proposal would make it easier for car buyers to compare different deals and shop around.
“It could also bring the price of finance down if it triggers greater competition on interest rates between lenders and removes the distorting effect of discretionary broker commission.
“The FCA’s proposal should improve consumer choice and transparency, and we support their efforts to make car finance work better.”