The FCA ban came into effect on 28 January 2021 and covers the use of discretionary commission models in the motor finance market where the amount of commission the broker receives is linked to the interest rate paid by the customer, and which the broker has the power to set or adjust.
The FCA’s ban doesn’t include commission. However, under the new rules, its existence and how it affects the amount payable by the customer must be disclosed, and the amount must be confirmed if the customer asks.
The regulator has said it expected brokers to negotiate alternative commission models, adding that it was deliberately not specifying which models they should use. It suggested alternative models could include risk-based pricing if the broker was not incentivised to set or adjust the rate charged, or flat-fee models.
Generally, the alternative to dealers’ discretionary commission finance has until now been fixed-rate finance, a simple model whereby customers are offered only one APR. Especially when applied to used rather than new cars, where the rate is likely to be lower thanks to manufacturer support. In reality, since a dealer loan (typically hire purchase or PCP) is secured against a car, the chance of it being granted at the advertised APR is better than for an unsecured personal loan, for which the chances of an application being approved at the advertised APR are low.
In terms of supervisory work to monitor how well firms are complying with the ban, this will begin in September 2021. The FCA said it would examine the alternative models being used by firms as well as the range of interest rates and the commission earned. We understand it is also planning a point-of-sale mystery shopping exercise to measure lenders’ control over dealer networks.