FCA bans motor finance discretionary commission

The FCA has today confirmed it will introduce a ban on discretionary commission models. This followed a consultation in October 2019.

Currently, some car retailers and motor finance brokers receive commission which is linked to the interest rate that customers pay - creating an incentive to sell more expensive credit to some customers.

The broker can effectively set the interest rate and the FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers' interests.

The FCA estimates the changes would save customers £165 million a year.

Preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance. 

In the light of consultation feedback and the additional operational pressures which the 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.

Christopher Woolard, the FCA's Interim Chief Executive, said:

'By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.

'We estimate that consumers could save £165 million because of today's action.'

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.