In the light of consultation feedback and the additional operational pressures which the motor finance sector is facing at present the FCA has agreed to give firms limited additional time to implement the new rules, with the ban coming into force on 28 January 2021.
The FCA will also make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These disclosure changes apply to many types of credit brokers and not just those selling motor finance. These changes will also come into force on 28 January 2021.
To comply with the ban on discretionary commission models, the FCA expects motor finance firms to negotiate alternative commission structures. The FCA is deliberately not specifying which commission models firms should use as it feels that this is a matter for firms themselves. The FCA adds that it could include firms moving to risk based pricing, provided the broker is not incentivised to set or adjust the rate charged. It could include flat fee models. Broker commission could also vary depending on other factors, such as by product or lender. Ultimately, once motor finance firms move away from discretionary commission models, the FCA expects to see consumers’ financing costs reduce.
The FCA feels that the changes to commission disclosure are relatively minor and designed to be low cost and result in refinements to firms’ existing practices. The FCA believes its changes will make it more likely that consumers get appropriate and timely information. In turn, this should increase consumers’ ability to make more appropriate decisions.
The FCA warns that it will look closely at any attempt by a motor finance firm to introduce a commission model that could lead to the same harm that it has sought to ban. It will monitor how well firms comply with the ban on discretionary commission models by carrying out supervisory work across a sample of firms. This work will start in September 2021. It will include looking at what commission models firms are using as an alternative to discretionary commission arrangements, and the ranges of interest rates and commission earnings. This information should help the FCA assess whether the potential for customer harm remains and, if so, how it should address it.
The FCA will also carry out a point-of-sale mystery shop exercise to measure lenders’ control over dealer networks. This work will assess whether firms, where they are required to, have taken appropriate steps to ensure dealers/brokers comply with relevant regulatory requirements.
The FCA plans to review its intervention in 2023/24. Using market research reports, it will track the volume and composition of motor finance agreements contracted over time (by type of agreement and for new/used cars) and the volume of vehicle purchases. This will enable the FCA to monitor finance agreements in new and used car sales.