Currently, some car retailers and motor finance brokers receive commission linked to the interest rate that customers pay, creating an incentive to sell more expensive credit to some customers.
The Financial Conduct Authority (FCA) has confirmed it will introduce a ban on discretionary commission models, following a consultation in October 2019.
Currently, some car retailers and motor finance brokers receive commission linked to the interest rate that customers pay, creating an incentive to sell more expensive credit to some customers.
The broker can effectively set the interest 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 could save customers £165m 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.
In the light of consultation feedback and the additional operational pressures which the sector is facing at present, the FCA has agreed to give firms limited additional time to implement the new rules, with the ban coming into force on 28 January 2021.
The FCA will also 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 disclosure changes apply to many types of credit brokers and not just those selling motor finance; these changes will also come into force on 28 January 2021.
Christopher Woolard, interim chief executive of the FCA, said: "By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.
"We estimate that consumers could save £165 million because of today’s action."
Adrian Dally, head of motor finance at the FLA, said: “This is a welcome announcement from the FCA as it provides clarity for the industry.
"We are also pleased that the regulator accepted our point about the need to monitor the consumer hire market as the ban on discretionary commissions does not extend to personal contract hire agreements.”
