FCA CP19/28 – Motor Finance Discretionary Commission Models and Consumer Credit Commission Disclosure

Overview

The FCA has proposed the following measures to address consumer harms it has identified in the motor finance market:

  1. Banning ‘discretionary commission models’ in the motor finance market.
  2. Minor changes to commission disclosure rules and guidance.

The FCA aims to finalise these rules at the beginning of Q2 of 2020, with firms being granted a three-month period to implement the proposed ban on discretionary commission models. The changes to FCA rules (CONC Handbook) would come into force on the day the rules are finalised.

These changes will be monitored in the three months following implementation, with a review of changes to consumer outcomes beginning in 2022.

Organisations have until 15 January 2020 to respond to the questions in the consultation document.

Banning Discretionary Commission Models

In the FCA’s March 2018 update on its work on motor finance, the regulator identified four main commission models used in sales of motor finance products: Increasing DiC, Reducing DiC, Scaled Commission and Flat Commission. The invention proposed in this consultation paper would ban the use of all but Flat Commission models. The specific intervention is as follows;

“…a ban on commission models where the amount received by the broker is linked to the interest rate that the customer pays and which the broker has the power to set or adjust.”

In turn, the FCA suggests that lenders “should have more control over the prices (interest rates) individual customers pay for motor finance.” The regulator maintains that brokers will still be able to earn commission from fixed fees or variable commission models that are not dependent on the interest rate.

Consumer Protection – In the FCA’s view, the use of discretionary models creates a conflict of interest that incentivises brokers to set higher interest rates for their customers. On page 11 of the consultation paper, the FCA acknowledges that many firms have moved away from using these models since the publication of its final findings. However, it suggests that some lenders may still be hesitant to follow suit as they are “wary of losing contracts with motor dealers to [lenders] that do not.”

Competition – FCA determines that by banning discretionary models, lenders will have better control over the interest rate and foster greater price competition between them.

Commission Disclosure

The FCA’s mystery shopping exercise found that only 1 out of 37 dealers surveyed disclosed to the customer that a commission may be received for arranging finance.

FCA has suggested that this could party be caused by a lack of clarity on what the rules require of firms. To rectify this, the regulator has proposed adjustments to the commission disclosure rules in CONC to give greater clarity on their intention. In general, the effect of these changes is to strengthen the requirement for firms to;

  • Disclose the existence and nature of financial arrangements with a lender that might impact upon the firm’s impartiality in promoting or recommending a credit product.
  • Also disclose to the customer, at the same time and with equal prominence, how the existence and nature of this commission, fee or other remuneration may affect the amounts payable by the customer under the relevant credit agreement or consumer hire agreement.
  • Disclose arrangements which, if made known to the customer, may affect the customer’s transactional decisions in a way which should enable the customer to reasonably appreciate the effect of the arrangements.

Consultation Questions

  1. Do you agree with our proposed ban on discretionary commission models in the motor finance market?
  2. Do you agree with a 3-month implementation period?
  3. Do you agree with our proposed commission disclosure clarifications?
  4. Do you agree our proposed commission disclosure clarifications should apply across all consumer credit markets?
  5. Do you agree our proposed commission disclosure clarifications should take effect on the day the rules are made?
  6. Do you agree with our analysis of the costs and benefits of the proposals?