What changes were proposed?

Motor finance – discretionary commission models

In its October 2019 consultation paper (CP19/28), the FCA proposed a ban on lenders and brokers in the motor finance market entering into agreements containing commission models where the amount received by the broker is linked to the interest rate that the customer pays and which the broker has the power to set or adjust (discretionary commission models). The most common examples in the motor finance market are Increasing Difference in Charges (DiC), Reducing DiC and Scaled commission models.

The FCA made the proposal in order to remove the financial incentive for motor finance brokers (including motor dealers) to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance.

Broker commission disclosure across all consumer credit markets

In its Motor Finance Review, the FCA found that only a small number of brokers in its sample disclosed to the customer that a commission may be received for arranging finance. Where disclosures were made, they were often not prominent. The FCA believed this was partly because its rules could be clearer on what it requires. Although its findings were limited to the context of motor finance sales, the FCA was concerned that its disclosure rules could also be being misinterpreted and applied too narrowly by brokers in other consumer credit markets.

It therefore proposed minor adjustments to some of the CONC commission disclosure rules and guidance to give greater clarity on their intention, as follows:

• Amendment of CONC 3.7.4G to make it clear that firms should disclose the nature of commission in their financial promotions (as well as when making a recommendation). Also, guidance clarifies that firms should consider the impact that commission could have on a customer’s willingness to transact and that firms should consider whether and how much commission can vary depending on the lender, product or other permissible factors and tailor their disclosures accordingly.
• Clarification of CONC 4.5.3R to the effect that the existence and nature of commission arrangements where the commission varies depending on the lender, product or other permissible factors should always be disclosed prominently. The disclosure must also cover how the arrangements could affect the price payable by the customer. This change to CONC 4.5.3R also applies to consumer hire brokers by virtue of the application of CONC 4.5.

The FCA also made it clear in the consultation paper that firms would need to consider the clarifications in the context of other variable commission models they use, for example where lenders pay different amounts, or where a lender pays a different amount depending on the product taken.

These clarifications apply to all credit broking, not just in the motor finance market, so will be relevant to all brokers of regulated credit and consumer hire agreements.

What's changed in the final rules?

The FCA's policy statement (PS20/8) confirms that it is going ahead with its consultation proposals largely as planned. It believes these measures will be the most effective way of addressing the harm it observed during its Motor Finance Review (as to which, see our previous blog from March 2019).

Changes from the consultation proposals include:

• Definition of discretionary commission arrangement for the ban on motor finance discretionary commission models: This has been amended to make it clear that it includes 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. The FCA explains that by including ‘financial consideration’ in the definition, it is looking to ban any practice where a broker is rewarded for adjusting the price a customer pays for motor finance. It has deliberately not defined what is meant by ‘financial consideration’ to prevent 'gaming'. The FCA thinks that limiting the definition to just the interest rate could lead to arbitrage and firms attempting to recoup losses, with consumers paying more in fees, charges and other elements that make up the total charge for credit.
• Keeping an eye on consumer hire: While the ban on discretionary commission models will only apply to those sectors that were in scope for its Motor Finance Review, which didn't include consumer hire, the FCA isn't ruling out further action in this market if it spots that similar commission models exist there and are leading to consumer harm.
• Extra implementation time: Given consultation feedback and the operational pressures which the sector is facing due to COVID-19, the FCA is giving firms limited additional time to implement the new rules and guidance, all of which will now come into force on 28 January 2021 (rather than the original proposal of three months from publication of the final rules). The FCA comments that this extra time 'will be particularly important as the industry transitions out of lockdown'.

What's next?

Going forward, the FCA will monitor how well firms comply with the ban on discretionary commission models by carrying out supervisory work across a sample of firms, starting in September 2021. The FCA will also carry out a point-of-sale mystery shop exercise to measure lenders’ control over dealer networks. It plans to review its intervention in 2023/24.

Authored by Virginia Montgomery and Roger Tym