How did the FCA conduct the review?
The FCA undertook a mystery shopping exercise with over 120 motor retailers and brokers representing a cross-section of the market. Several surveys of lenders were also undertaken covering questions on affordability and creditworthiness and commission arrangements they held with dealer groups. The FCA also reviewed over 1,000 commission contracts and analysed data held by the Credit Reference Agencies.
What issues did the FCA highlight?
Customer information
- Most motor retailers appeared to make sufficient efforts to establish customers’ change cycles, ownership/usership preferences and budget
- Franchised retailers and online brokers performed well in the survey and the FCA notes that this may in part reflect the respective investments made in staff training by the different industry sectors
- However mystery shopping raised concerns that some retailers performed less well on pre-contractual disclosure and explanations (independent retailers particularly)
- Customers may not be given sufficient information in good time to make an informed decision
Customer information – commission disclosure
- The FCA has now clarified that it expects dealers / brokers to disclose the existence of commission that gives discretion to the dealer to increase the interest rate such as Difference in Charges (DiC) or upward interest rate adjustment commission and similar arrangement. Under the FCA's rules CONC 4.5.3R sets out that Disclosure must be in good time before the agreement is entered into.
- The FCA emphasised that pre-contractual explanations must be clear and transparent ensuring that the customer is aware of the features of the finance product so that they can make well informed decisions.
Commission structures
- In DiC arrangements, there is a strong association between higher interest rates and commissions, and customers could end up paying more.
- DiC models appear to break the link between credit risk and interest rate.
- Broker discretion therefore has potential for significant consumer harm from DiC and to a lesser extent scaled commission models.
- FCA expects lenders to review their systems and controls in the light of these findings to address potential harm.
What are the next steps?
The FCA is consulting with lenders and motor dealers on assessing options for policy intervention including:
- banning DiC
- limiting broker discretion
- strengthening CONC rules
The FLA is continuing to strengthen its motor finance training package for lender and retail staff, ensuring that the highest standards of customer service and compliance are the norm across the entire industry. To view the FCA's final findings on motor finance please click here.