FCA considering intervention on motor finance commission

The regulator said that it was "assessing its options" following a review of the market, the final findings of which have now been published. The options it has identified include strengthening the existing rules, or potentially banning certain types of commission model or limiting brokers' discretion to set interest rates.

As part of its work, the FCA has been carrying out 'mystery shopping' exercises with lenders and brokers, including car retailers. It said that some firms were not disclosing enough information about commission to enable their customers to make informed decisions, and were not properly assessing creditworthiness including affordability.

The FCA said that it would follow up directly with individual firms to address the issues it had identified, along with its wider work on commission.

"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," said Jonathan Davidson, the FCA's executive director of supervision for retail and authorisations. "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," he said.

The FCA is particularly concerned about a commission model known as difference in charges (DiC), which it said was in "widespread" use in the sector. This model links broker commission to the customer interest rate, which brokers have wide discretion to set. The FCA said it was "not clear" why brokers had this discretion, and that it was concerned that lenders were not adequately controlling brokers' resulting conflict of interest.

Research by the FCA suggests that individual consumers may be paying up to £1,000 more in interest than they would be under a 'flat fee' model, where there is no broker discretion. It is therefore considering whether use of DiC and similar arrangements should be restricted or banned, or whether limits should be placed on broker discretion to set interest rates.

During its mystery shopping visits to brokers, the FCA found that only a small number disclosed that they may be entitled to commission for arranging finance. Where disclosures were made, they were often not sufficiently prominent to comply with regulatory requirements that these be clear, fair and not misleading, and were unlikely to be noticed by consumers.

Financial regulation expert Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law.com, said that firms should be proactively reviewing their commission arrangements in anticipation of the FCA's next steps.

"In particular, firms should examine situations where brokers may have discretion to set interest rates, and assess whether this is resulting in customers paying more for their vehicles than may be considered fair or reasonable," she said.

"Any such assessment will need to be considered against the broader disclosure requirements and affordability considerations, and any books that are displaying indicators of harm or a high volume of complaints should be carefully reviewed," she said.