FCA Report on PCP sales finds two key commission models wanting

PERSONAL Contract Purchases (PCPs) provided the finance for 82% of UK new car sales in 2017.

These loans supported a six-year long new car sales boom through to Q2 2017, when the FCA began to explore how this finance was being sold.

Early FCA investigations detailed in its interim report on motor finance (published in March 2018), flagged up concerns associated with some commission arrangements which the regulator thought may be incentivising brokers to arrange PCP finance at higher interest rates.

However, the key findings in the FCA’s final report, published in March 2019, are more categorical: 

The two structures under scrutiny are the Increasing Difference in Charges (Increasing DiC) and the Reducing Difference in Charges (Reducing DiC).

Both give the broker discretion to set the interest rate payable by the customer, within parameters set by the lender. The FCA found 95% of franchise dealers, independent dealers and online brokers were using these two structures:

We found that Increasing Difference in Charges (DiC) and Reducing DiC commission arrangements can provide incentives to brokers to arrange finance at higher interest rates. This is because the amount of commission increases with the interest rate that the consumer is charged.

• The DiC models showed a correlation between broker earnings and higher customer interest rates – suggesting that dealer brokers are effectively being incentivised to charge customers more than lenders set, to access higher commissions. 
• The regulator is now placing the onus on lenders to show that any differences in commission levels given to brokers are based on extra work required. Lenders are to review their systems and controls in the light of these findings. 
• A regulator-commissioned mystery shopping exercise in dealerships found just over a quarter (28%) explained the total amount payable within the life of the PCP arrangement; consequences arising from failure to make payments under the agreement; and the effect of withdrawing from the agreement mid-term.
• There was also poor disclosure of the fact that broker commission may be received for arranging the finance. Sales training and document improvement work is clearly required.
• The FCA estimated that on a typical motor finance agreement of £10,000, higher broker commission can result in a customer paying around £1,100 more in interest charges over a four-year term. 
• The current commission arrangements were incentivising consumers to be over-charged to the tune of £300m a year, according to the regulator’s estimates. 
• The FCA is now tightening its CONC (Consumer Credit Sourcebook) conduct of business rules. They may even ban Increasing and Reducing DiC arrangements altogether.

So, what now? Certainly, changes are afoot. We may even see the FCA ban commissions and sales incentives associated with car loans altogether, as they did in the world of financial advice in 2013. 

An enforced move from product provider-set commission-based sales to upfront fee-based charging for the actual advice became the key plank of what it called the Retail Distribution Review or RDR.

Treating the customer fairly is the FCA’s key mantra in all areas of financial services and it appears that it has identified one aspect of PCP selling which is not always in the best interests of some borrowers. 

Neil Watkiss, Head of Consumer Credit at the F&I platform DealTrak commented on the FCA Report:

“The FCA also implies that lenders are more invested in their own credit risk, than assessing the affordability of the loan for the customer, when of course dealers and brokers have a significant role to play when it comes to establishing affordability.” 

Judging by this Report, dealers will need to tighten their car financing sales processes and communications even further this year.