The Financial Conduct Authority (FCA) is considering changes to the way in which commission works in the motor finance sector after uncovering serious concerns about the way in which lenders are choosing to reward car retailers and other credit brokers. The findings form part of the final report of the FCA’s work on motor finance published on 4 March.
The FCA found that the widespread use of commission models which allow brokers discretion to set the customer interest rate, and thus earn higher commission, can lead to conflicts of interest which are not controlled adequately by lenders. This can lead to customers paying significantly more for their motor finance.
Some car buyers have been overcharged by more than £1000 and the FCA says the industry practice of allowing dealers to set their own interest rates was costing consumers £300m a year.
The FCA is assessing the options for intervening in the market which would address the harm it has identified. This could include strengthening existing FCA rules or other steps such as banning certain types of commission model or limiting broker discretion.
Describing the practice as “unacceptable”, Jonathan Davidson, executive director of supervision – retail and authorisations at the FCA, added: “’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.”
As part of its work the FCA also carried out mystery shopping of firms. The FCA found that where disclosures were given, these were not always complete, clear or easy to understand and as a result customers might not be given enough information to enable informed decisions. The FCA was also not satisfied that all lenders were complying with the rules on assessing creditworthiness including affordability.
The FCA launched its review of the motor finance market in 2017.