FCA to decide soon on motor finance commission models

IT came as no surprise when the Financial Conduct Authority (FCA) announced that car dealers and motor finance brokers will likely be banned from receiving commission linked to interest paid by the consumer.

The FCA is consulting with the motor finance brokers on whether to push through an all-out ban on the payment of sales commissions on F&I product sales until 15 January 2020. The regulator will publish final rules by the middle of next year.

The regulator has been investigating the car finance market for over two years, originally outlining a plan to review the automotive market in their business plan of 2017/18.

According to the Financial Times “the FCA’s action comes after car finance agreements in the UK increased from 1.2m to 2.3m in 2016, enabling British customers to borrow a record £31bn.”

The near doubling of the mostly PCP contracts underpinning new car purchases in just one year was bound to attract the attention of the regulator – even if it’s taken them nearly three years to act.

The FCA’s interim report published back in March 2018 uncovered widespread use of commission models that link brokers’ commission to the interest rate charged to the customer and high incidences of firms not complying with existing rules and guidance on the information they should disclose to customers. 

Since then the FCA has concentrated on developing new rules designed to regulate the motor finance market. Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance.

“By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”

So, what does all this mean for car dealerships? Well, certainly change is coming. A good starting point is to familiarise yourself with the FCA review findings that were published back in March. The key findings are:

1. Some customers are paying significantly more for their motor finance because of the way lenders choose to remunerate their brokers.
2. A particular concern is about the widespread use of commission models, such as Difference in Charges (DiC), which link the broker commission to the customer interest rate and allow brokers wide discretion to set the interest rate.
3. DiC creates conflicts of interest and creates strong incentives for the broker to charge a higher interest rate, to earn more commission.
4. Mystery shopping results raised concerns in relation to disclosure of commission, and other pre-contractual disclosure and explanations.
5. Firms are failing to comply with relevant regulatory requirements, including around affordability assessment.
6. Change is needed across the market.
7. There is a need to assess the options for policy intervention in relation to commission arrangements.
8. All firms acting as lenders or brokers in the motor finance sector should read the report and consider whether they need to review or amend their policies and procedures and associated systems and controls.

In reality, the FCA is basing its plans to review regulations on market research that was undertaken over two years ago. Since then many dealerships have already made positive strides to tighten and improve their systems and processes. Whereas DiC commissions represented half of the prime used car market back in 2017, the majority have already ditched this model.

Other sensible areas to look at within a dealership includes:

1. Reviewing systems and processes: are customer facing staff trained adequately to deal with customer questions, particularly when it comes to motor finance options?
2. Ensure you ask the right questions of your customers and make sure you fully assess the creditworthiness of a potential buyer.
3. Is your dealership fully transparent? Make sure you disclose the full details before your customer signs any agreement and gives you a deposit.
4. Use digital processes so that you can clearly track and demonstrate how deals were done.
5. Revise and reframe your systems and controls between your dealership and your broker.

The FCA has shone a light on some of the shadier ways that commission is paid. Turn this into a positive.

Prove to your customers that you are open and transparent – maybe promote a flat fee commission payment and clearly articulate what work you are doing for that fee each time you levy it.