Britain’s financial watchdog is cracking down on the way car dealers and car finance brokers make commission on sales, a move that it says will save drivers £165m.
The Financial Conduct Authority said it would ban the way some car retailers and brokers received commission linked to the interest rate customers paid on the loan they took out to buy a car. The arrangement means the higher the interest rate, the more commission is payable.
The seller can set the rate and the FCA found that “the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests”.
Banning this kind of commission would remove the financial incentive for brokers to increase the interest rate paid by customers, and give lenders more control over the prices customers pay for their motor finance, the watchdog said.
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.”
The FCA has been investigating the fast-growing car finance market for two years and published a report in March, which found that “some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves”.
Sarah Nield, financial services risk and regulation director at PwC, said: “Given the largest commissions received by brokers tend to come via the models set to be banned, it will be interesting to see how lenders, brokers and dealerships react. Although we expect firms to comply with the spirit of the changes, it could result in unintended consequences including increased flat fee commission payments, car prices and bundled product costs.”
The FCA is also proposing changes to the way customers are told about the commission to ensure they receive “more relevant information”. These changes would apply to many types of credit brokers and not just those selling motor finance.
The watchdog is consulting on the new rules until 15 January 2020 and plans to publish final rules later next year.
Sue Robinson, director of the National Franchised Dealers Association, said: “Clear rules are positive for the industry but we would urge that they are proportionate so there is a satisfactory outcome for both consumers and retailers.”
Scott Cargill, chief executive of Admiral Financial Services, said: “Car buyers need to know that they don’t have to pay these big commissions and do have the option of taking out car finance directly from other lenders – potentially saving thousands of pounds in interest. The car finance industry has been slow to catch up with other sectors and this has been to the detriment of the car-buying public.”
