FCA acts to address unclear and excessive motor finance costs

We have been looking at the motor finance market to ensure that it works well and to assess whether consumers are at risk of harm.

We published interim findings in March 2018, and have since focused on issues relating to commission arrangements, pre-contract disclosures and affordability assessments.

This work included a survey of 20 motor finance providers, an analysis of loan data and a mystery shop exercise.

We published a final report on 4 March 2019, along with a press release.

In particular, we have serious concerns about the way in which lenders in the motor finance market are choosing to reward car retailers and other credit brokers.

We have found that the widespread use of commission models which allow brokers discretion to set the customer interest rate, to earn higher commission, can lead to conflicts of interest which are not controlled adequately by lenders. This can lead to customers paying significantly more for their motor finance.

In light of this, we are assessing the options for intervening to address the harm we have identified. This could include strengthening existing FCA rules or other steps such as banning certain types of commission model or limiting broker discretion. 

Key findings

  • The way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale.
  • Some customers are paying significantly more for their motor finance because of the way lenders choose to remunerate their brokers.
  • In particular, we are concerned 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.
  • This gives rise to conflicts of interest and creates strong incentives for the broker to charge a higher interest rate, to earn more commission.
  • Across the firms in our analysis (around 60% of the market) we estimate that such commission models could be costing customers £300 million more annually than under flat fee models (where there is no broker discretion).  
  • Our mystery shopping results raised concerns also in relation to disclosure of commission, and other pre-contractual disclosure and explanations.
  • We are not satisfied that firms are complying with relevant regulatory requirements, including around affordability assessment.
  • We will follow up with individual firms – both lenders and brokers – where we have concerns. However, we consider that change is needed across the market.
  • We have therefore started work with a view to assessing the options for policy intervention in relation to commission arrangements.
  • Subject to cost benefit analysis, this could involve consulting on changes to our rules to strengthen existing provisions or other policy interventions such as banning DiC and similar commission models or limiting broker discretion. 

All firms acting as lenders or brokers in the motor finance sector should read this report and consider whether they need to review or amend their policies and procedures and associated systems and controls.