Following today’s announcement from Financial Conduct Authority (FCA) on its plans to ban the way in which some car retailers, and other brokers in the motor finance sector, receive commission, Stephen Dawson, financial services sector head at Shoosmiths LLP said:
“This consultation doesn’t come as any surprise to the industry – we have been expecting action from the FCA since we sat down with them in recent weeks. Clearly the principal impact will be for both brokers and motor finance providers creating something of a level commission playing field, with the ultimate aim of benefitting consumers.
“I am delighted that firstly that there are no proposed changes on the rules for creditworthiness assessments. In the context of commission however, and a ban on discretionary commission models, the challenge in this market is not necessarily commission itself, but more so the discretion afforded to brokers in setting the rates that directly affect the cost of motor finance for consumers. The discretion element, creating an obvious conflict of interests, is where we see the real impact of this consultation. And I certainly welcome anything that builds trust, maintains competition and allows innovation in the market. The one risk being that flat fee models and reduced commissions in one part of the customer transaction could push up costs in other parts (the vehicle cost itself for example) or encourage more pushy sales of additional products, making the transaction more complex.
“The other principal aim is to enhance the disclosure requirements around the existence and nature of commission models, as part of the brokering process. In my view, this may result in more information for consumers (which can be very helpful) but we do also risk overload if the explanations are complex and involve additional paperwork. This would be an own goal.
“If we do have rules in place for the end of Q2 2020 then the industry will need to respond quickly to the consultation and continue with the evolution that is already under way.”
We are consulting on plans to ban commission models that give motor finance brokers/dealers an incentive to raise customers’ interest rates. We are also consulting on minor changes to some of our rules and guidance to ensure that many types of credit broker give consumers more relevant information about commission.