On 15 October 2019, the FCA published Consultation Paper 19/28: Motor finance discretionary commission models and consumer credit commission disclosure (CP19/28). In CP19/28 the FCA is proposing a ban on commission models where the amount received by the broker (including motor dealers) is linked to the interest rate that the customer pays and which the broker has the power to set or adjust. The FCA refers to these as ‘discretionary commission models’ and has found in earlier reports that these models give rise to conflicts of interest and creates strong incentives for brokers to increase the interest rate paid by their customers to earn more commission.
The most common examples of discretionary commission models in the motor finance market are:
- Increasing Difference in Charges (DiC), also known as ‘Interest Rate Upward Adjustment’. In this model, brokers are paid a fee which is linked to the interest rate payable by the customer. The contract between the lender and the broker sets a minimum interest rate, and the fee is a proportion of the difference in interest charges between the actual interest rate and the minimum interest rate;
- Reducing DiC, also known as ‘Interest Rate Downward Adjustment’. This is similar to Increasing DiC, except that the contract between the lender and the broker sets a maximum interest rate; and
- Scaled commission models, also known as a variable product fee. The broker is paid a fee which varies (within parameters) according to the interest rate.
The FCA does not expect its intervention to result in significant unintended consequences for brokers or lenders. The FCA is aware that some firms have moved, or intend to move, away from using discretionary commission models in recognition of the harm they cause. The FCA reports that it has been told that some lenders want to move away from these models, but are wary of losing contracts with motor dealers to those lenders that do not. The FCA believes that banning discretionary models would remove this potential disadvantage.
Under the FCA’s proposed rules set out in Appendix 1 of CP19/28:
- the FCA proposes defining ‘discretionary commission arrangement’ with reference to the total charge for credit, rather than just the interest rate. This is designed to prevent firms from circumventing the FCA’s proposed ban;
- brokers would still be able to earn commissions from fixed fees or variable commission models that are not dependent on the interest rate; and
- firms would be allowed to continue operating models where the amount of commission is determined by the amount of work carried out by the broker. The FCA states, that in principle, there may be a rationale for higher commissions where the broker undertakes more work on the lender’s behalf to gather information and make an initial assessment. However, the FCA has not found evidence of brokers undertaking more detailed work where they earned a higher commission in the sample of agreements it looked at in its motor finance review.
In chapter 4 of CP19/28 the FCA sets out further proposals to clarify the Consumer Credit sourcebook (CONC) provisions concerning commission disclosure. These draft rules are also set out in Appendix 1 of CP19/28:
- CONC 3.7.4G is amended so it is clear that firms should disclose the nature of commission in their financial promotions (as well as when making a recommendation). The guidance clarifies that firms should consider the impact commission could have on a customer’s willingness to transact and that firms should consider whether and how much commission can vary depending on the lender, product or other permissible factors and tailor their disclosures accordingly; and
- CONC 4.5.3R is amended to clarify that the existence and nature of commission arrangements where the commission varies depending on the lender, product or other permissible factors should always be disclosed prominently. The disclosure must also cover how the arrangements could affect the price payable by the customer.
The deadline for comments to CP19/28 is 15 January 2020. The FCA will consider the feedback received and intends to publish a Policy Statement including its final rules at the beginning of Q2 2020.
If the proposed rules are introduced as planned, the FCA will monitor firms’ compliance with the ban on discretionary commission models by carrying out supervisory work across a sample of firms. Firms will have three months to implement the ban. The FCA will conduct a review of how its intervention is working for consumers, starting in 2022.