Finance watchdog to ban commission linked to interest rate

  15 October 2019

The FCA has revealed its intention to ban commission linked to the interest rate that customers pay on motor finance products. The new rules are likely to be put into operation next year.
Currently, some finance brokers receive commission which is linked to the interest rate that customers pay. The broker can set that rate and the FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests. The FCA estimates the changes would save customers £165 million a year.
Preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate a customer pays and give lenders more control over the prices customers pay for their motor finance.

However, since the FCA announced earlier this year it would investigate the market, the proportion of finance sold using a discretionary commission model is “very small and diminishing” according to the Finance and Leasing Association.
The new rules are expected to be announced just after Easter 2020 after the FCA has finished its consultation on the subject on 15 January 2020 with the rules coming into force a further three months later.
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.”
An FCA spokesman added: “The FCA is also proposing to make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These changes would apply to many types of credit brokers and not just those selling motor finance.”

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