FCA issues policy statement on motor finance discretionary commission models and consumer credit commission disclosure

• United Kingdom

• Financial services and markets regulation
• Financial services disputes and investigations
• Payment systems and digital commerce
• Financial services - Retail finance

07-08-2020

On 28 July 2020, FCA released its Policy Statement (PS20/8) regarding motor finance discretionary commission models and consumer credit commission disclosure. Our briefing note on the consultation to PS20/8 (CP19/28) can be found here.

To recap, FCA consulted on its plan to ban commission models which incentivise motor finance brokers to raise customers’ financing costs, following concerns over the impact of widespread use of commission models that link broker’s commission to the customer’s interest rate under the finance agreement and allow brokers wide discretion to set or adjust that rate. The purpose of the ban being to break the link between the amount of commission received by the broker and the price the customer pays.

Having considered feedback received during its consultation, FCA has confirmed that it will proceed with its proposals largely as planned. Notably, firms will now be afforded a longer period of time to implement the rules. The ban on discretionary commission models in motor finance will take effect at the same time as changes to the commission disclosure requirements (applicable to all credit sectors) from 28 January 2021.     

We have highlighted the key issues raised in PS20/8 below.

Ban on discretionary commission models

• In banning discretionary commission models, FCA has chosen not to prescribe which commission model should be utilised by motor finance firms. Instead, the expectation is that motor finance firms will negotiate alternative commission structures, including risk based pricing, flat fees or variable dependent on product or lender. Renegotiation of contracts will need to take place now if they have not already started.
• FCA noted that respondents largely agreed that discretionary commission models caused consumer harm, with some arguing that the ban should be broadened to other markets. Industry respondents sought additional guidance on the type and manner of commission models requiring disclosure.
• Definition of discretionary commission arrangement: FCA has clarified the definition of discretionary commission arrangement to make clear that it includes arrangements where any commission, fee or financial consideration is payable (directly or indirectly) in connection with the regulated credit agreement, and where this is (in whole or in part) affected by the interest rate (or other item within the total charge for credit) set or negotiated by the broker.
• Other commission models and commercial arrangements: With respect to commission models based on other factors such as loan size, the FCA did not find specific harm to consumers. It is therefore not proposing to ban such commission models. Therefore fixed rate commission models based on credit balances are allowed.
• Secondary brokers: FCA noted that “secondary” brokers (who do not effect introductions of individuals directly to courses of credit, but to another broker) did not come within scope of its ban on discretionary commission models
• Consumer hire: In response to industry concerns that the ban would not apply to consumer hire arrangements, FCA confirmed that consumer hire did not form its motor finance review and therefore out of scope for consumer hire. FCA will continue to monitor the consumer hire sector for harmful commission models.

Amendments to commission disclosures

• FCA say that it has not made wholesale changes to commission disclosures which apply to both credit and hire products (unlike the ban itself), but rather added refinements to firms’ existing practices. This is to ensure consumers get appropriate and timely information.
• Importantly, the commission disclosure rules and guidance apply to other consumer credit and hire markets, not just motor. FCA noted that most respondents were in agreement regarding the widened scope of changes in this regard.

Next steps

Now is the time, if you haven’t already, to renegotiate commission arrangements with any brokers for whom you have DIC arrangements in place and obtain assurance that they will be in a position to comply with the new disclosure requirements. Our team have already advised a number of clients with the implementation of these changes so please do not hesitate to contact our experienced consumer finance lawyers who will be able to assist you.

Source: PS20/8