Car finance customers will save a collective £165 million a year after the UK’s financial watchdog banned “discretionary commissions” for dealers.
The Financial Conduct Authority (FCA) is outlawing the practice of dealers and brokers linking commissions to the customers’ finance interest rates, saying it goes against customers’ interest.
With discretionary commissions, car dealers and finance brokers receive commission which is linked to the interest rate that customers pay, which the FCA says creates an incentive for the dealer to sell more expensive credit to some customers than is necessary.
The FCA launched an investigation into the practice last year after finding evidence that customers were being deliberately overcharged to drive up dealers’ commissions.
The ban will come into force on January 28, 2021. The FCA said the delay between its decision and the implementation of the ban reflected feedback from dealers and brokers as well as the additional pressures the industry is currently facing.
Christopher Woolard, the FCA’s interim chief executive, said: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.
“We estimate that consumers could save £165 million because of today’s action.”
The FCA will also make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information.
The Finance and Leasing Association, whose members provide car finance among other services, welcomed the announcement.
Its head of motor finance, Adrian Dally, said: “This is a welcome announcement from the FCA as it provides clarity for the industry. We are also pleased that the regulator accepted our point about the need to monitor the consumer hire market as the ban on discretionary commissions does not extend to personal contract hire agreements.”