As it stands, and prior to the new rules coming into force, some car retailers and motor finance brokers receive commission linked to the interest rate on the agreement, incentivising them to sell more expensive credit to customers. This enables the broker to effectively set the interest rate payable by customers, with the FCA finding that widespread usage of this commission model creates an incentive for brokers to act against customers’ interests. The FCA states that implementation of rules such as this will give lenders greater levels of control over the prices their customers pay for motor finance, as it removes the financial incentive for brokers to increase interest rates imposed on customers.
This is likely to gain customer support, with Christopher Woolard, the FCA’s Interim Chief Executive stating:
“By banning this type of commission, where brokers are rewarded for charging customers higher rates, we will increase competition and protect consumers...We estimate that consumers could save £165 million because of today’s action.”
As a result of these rule changes lenders will need to review their commission arrangements with brokers. It is important to note that the FCA has stated that the definition of “discretionary commission arrangement” should be interpreted broadly to include “where any commission, fee or other financial consideration is payable directly or indirectly in connection with the regulated credit agreement, and where this is wholly or partly affected by the interest rate (or other item within the total charge for credit) set or negotiated by the broker.” (PS20/8, paragraph 2.13) Any attempts to increase the benefit to the broker as a result of the increased cost of the credit to the customer will now be caught by the definition.
Where changes are required lenders will need to develop an alternative matrix for setting rates and commission levels. It may be that a fixed rate and fixed commission model will be appropriate. Alternatively, variable rates set by risk factors may be appropriate if the lender can rely on the broker to reliably set the customer risk together with blended commission rates or commission rates set by interest rate bands. Various factors will be relevant in determining the most appropriate approach including the scale of the business and the customer base as well as volume of business.
The FCA is also updating the rules regulating the way in which customers are notified about the commission they pay, to ensure that they receive relevant information. These disclosure requirements will apply to many types of credit brokers, not just those selling motor finance, with these changes also coming into force on 28 January 2021.
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