In respect of commission structures, the FCA assessed data from 2013 to 2016, divided across four common types of commission structure - Increasing Difference in Charges (Increasing DiC), Reducing Difference in Charges (Reducing DiC), Scaled Commission (Scaled) and Flat Fee Commission (Flat Fee).
The FCA’s research found that both Increasing DiC and Reducing DiC arrangements were capable of providing strong incentives for brokers to arrange finance at higher interest rates, since the amount of commission earned under those structures increased with the interest rate that the consumer was charged. This was borne out in the FCA’s analysis of the data which showed that, even after controlling for other factors (including credit scores), customers of brokers operating under a DiC commission structure typically faced a higher interest rate than customers of brokers operating on a Scaled or Flat Fee basis.
On a typical motor finance agreement of £10,000, the FCA found that increasing commission under a Reducing DiC model was typically associated with an increase in interest costs of around £1,100 over the four-year term of the agreement or an increase of 50% in interest costs.
In light of its findings, the FCA has started policy work with a view to assessing the options for policy intervention, which could include banning DiC commission structures (and similar commission models) or limiting broker discretion over interest rates. The FCA has also stated that it expects lenders to review their systems and controls, in light of its findings, and to address any harm, or potential harm, identified.
Sufficient, timely and transparent information
The FCA conducted a limited scale mystery shopping exercise, focusing in particular on smaller, independent dealerships offering Personal Contract Purchase (PCP) or other forms of hire-purchase (HP). Whilst the small scale of the mystery shopping exercise makes it difficult extrapolate to the wider motor finance market, the FCA did observe a number of weaknesses in the provision of information by dealers, including:
Brokers were sometimes quick to focus in on a particular finance product (e.g. PCP) early in the sales process and sometimes ignored or passed over information provided by the customer (e.g. that they wanted to own the vehicle outright at the end of the agreement);
Brokers sometimes focused too heavily on the attractive features of a product (e.g. the lower initial payments offered by a PCP) without providing a sufficient explanation of the downsides of a product (e.g. the final balloon payment);
In some cases pre-contractual information disclosures or explanations given during the initial visit were incomplete (and sometimes potentially misleading) raising doubts as to compliance with relevant obligations; and
A general lack of transparency over commission rates and exclusivity, particularly in relation to DiC and similar commission arrangements which allow the broker discretion to adjust the interest rate, to earn more commission.
Despite the small nature of the FCA’s study, it has stated that it has started work with a view to assessing the options for policy intervention, which could include consulting on changes to the CONC rules and guidance to strengthen existing provisions.
The FCA sent a questionnaire to 20 motor finance lenders in order to assess the controls they had in place to monitor their brokers’ compliance with the FCA’s rules and guidance. Controls ranged from conducting checks on the regulatory status of brokers and periodic monitoring (including quarterly visits and annual audits) to computer driven point of sale systems which guide staff through the compliance elements of the sales process and the capturing of digital signatures from customers to confirm that they have been provided with the relevant pre-contractual information.
Based upon the questionnaire responses received, the FCA has expressed concern that some lenders may be unduly reliant on contractual requirements and the provision of standard documentation and procedures, and may not monitor brokers sufficiently closely or act where issues are found.
Whilst the FCA did not state that it felt that policy intervention was necessary (other than potentially in respect of DiCs, as stated above) it did take the oportunity to remind lenders that they are required to take reasonable steps to ensure that persons acting on their behalf (including brokers) comply with CONC, and that it expected lenders to review their systems and controls in this area.
The FCA sent a questionnaire to 20 motor finance lenders in order to assess their approach to determining affordability. It should be noted in this regard that the FCA’s questionnaire predated the FCA’s new rules and guidance on assessing affordability (as set out in PS18/19
) which came into force in November 2018.
The FCA noted that in 5 cases the firms’ processes appeared to be broadly in line with the prevailing CONC requirements at the time (but changes may have been needed in light of the new creditworthiness rules from 1 November, for example in relation to policies and procedures or being able to demonstrate compliance).
In 8 cases, the firms’ responses to the questionnaire were not detailed enough to enable the FCA to assess their compliance with CONC. In a small number of cases the focus appeared to be on credit risk, rather than affordability, with insufficient checks on ability to repay without the repayments having a significant adverse impact on the customer’s financial situation.
Whilst the FCA did not state that it felt that further policy intervention was necessary (and instead pointed firms towards the new provisions introduced by PS18/19). We would recommend that (to the extent that they have not already done so) motor finance lenders read and reflect upon policy statement and consider the extent to which their affordability assement processes may need to be strengthened.