FCA bans interest-linked commission models in car finance market

The change, which will come into effect on January 28 2021, will stop commissions being linked to the interest rate that customers pay. The regulator estimates this change will save customers £165m a year.

Currently, some car retailers and motor finance brokers receive commissions linked to the interest rate that customers pay, which can be effectively set by the broker, creating an incentive to sell more expensive credit to some customers.

The FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests.

The change will remove the financial incentive for brokers to increase the interest rate that a customer pays, and will give lenders more control over the prices customers pay for their motor finance.

Christopher Woolard, the FCA’s interim chief executive, said: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”

“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.”

Welcoming the clarity the FCA has provided for the industry, Adrian Dally, head of motor finance at the Finance and Leasing Association (FLA) said: “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.”

The FCA recently released guidance on keeping customers well informed on the implications of a payment deferral.