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FCA moves to curb “unclear and excessive” motor finance costs

The Financial Conduct Authority (FCA) will take measures to regulate the way commission is awarded in the car finance sector after it raised concerns over the way car retailers and credit brokers are rewarded.

The curbs, which are outlined in the regulator’s final Motor Finance Review, come after it found that the widespread use of commission models “allow brokers discretion to set the customer interest rate” and earn higher commission as a result. It added that such models lead to conflicts of interest which are not controlled adequately by lenders and can cause customers to pay more.


Across the firms in the FCA’s analysis, which amounts to around 60 percent of the market, it estimates that commission models which allow broker discretion over the interest rate could be costing customers £300m more annually.


Indeed, it estimates that on a typical motor finance agreement of £10,000, higher broker commission under the reducing difference in commissions (DiC) model can result in the customer paying around £1,100 more in interest charges over the four-year term of the agreement.


The FCA said it is unclear as to why brokers should have such wide discretion to set or adjust interest rates to earn more commission and it is concerned that lenders are not doing enough to monitor and reduce the risk of harm to customers.


It also found such commission arrangements can break the link that might otherwise be expected between credit risk and the customer interest rate, potentially having an impact on pricing and affordability for individual customers.


The FCA said it is assessing the options for intervening in the market which would address the harm it has identified. It said that could include strengthening existing FCA rules or further steps such as banning certain types of commission model or limiting broker discretion.


Jonathan Davidson, executive director of supervision – retail and authorisations at the FCA, said: “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. We estimate this could be costing consumers £300m annually. 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.”

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