The consultation, which closes on 15 January 2020, comes after a review of the market by the regulator. The FCA indicated that it would put forward new rules in response to its "serious concerns" that the current arrangements were pushing up prices for consumers.
The FCA has proposed banning the discretionary commission model widely in use in the sector under which broker commission is linked to the customer interest rate, which the broker has a wide discretion to set. The broker in this case is often the car retailer. The change would save customers around £165 million a year, according to FCA estimates.
Lauren McCarthy
Lawyer
We would expect this to lead to better customer outcomes in the long term, with the pricing of car loans through car dealers becoming much more transparent.
The FCA also intends to make changes to the way in which customers are told about the commission that they pay to a credit broker. This change would apply not only to motor finance brokers, but to other types of credit broker too.
FCA director Christopher Woolard said that preventing the use of discretionary commission would remove the incentive for brokers to increase the interest rate paid by the customer, and give lenders more control over the prices customers pay for motor finance products.
"We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance," he said. "By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money."
Financial regulation expert Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law, said that the proposals were "consistent with the FCA's continued focus on vulnerable customers".
"We would expect this to lead to better customer outcomes in the long term, with the pricing of car loans through car dealers becoming much more transparent," she said.
"It will be interesting to see whether there is industry support for the FCA's proposed wholesale ban on flexible commission arrangements, where even reductions on the lender's baseline interest rate are banned. Reducing interest rates on offer allows car dealers a competitive advantage, and it is difficult to see how this will lead to widespread consumer detriment in the long term, particularly where new disclosure rules will lead to greater transparency in the market," she said.
She urged motor finance providers to continue to review their discretionary commission models and identify whether they could make any changes in anticipation of the FCA's final rules, which it expects to publish later in 2020.
McCarthy said that the FCA's proposal was similar to the ban on discretionary commission introduced in Australia last November, by the Australian Securities and Investments Commission (ASIC).
"The ban followed rounds of consultations by ASIC, as well as public hearings during Australia's financial services Royal Commission, where it was widely acknowledged that discretionary commission models create poor customer outcomes. This is because of the way the models link interest rates to the dealer's negotiation power, often at the expense of less financially experienced customers," she said.