Risks posed to customers from incentive schemes

The FCA is continuing the review work started by the Financial Services Authority (FSA) into firms' remuneration and incentive schemes, and the risks which these may pose to customers.

In 2017 the FCA published findings of their Thematic Review on staff remuneration and incentives, for example how dealers and finance providers pay commission to their own staff, and issued a consultation on changes to CONC along with draft guidance.

Also in 2017 the FCA started its exploratory work on the motor finance market.  The FCA reviewed commission arrangements between motor finance providers and dealers and its findings, published in March 2019, showed that the use of some commission products had led to consumers paying higher interest costs than they should have done. 

The findings showed a strong connection between commission that gave dealers the flexibility to vary the interest rate or APR for each customer and higher interest costs.   The FCA had estimated that ‘discretionary’ commission products of this kind, on average, led to additional costs of £1,100 to the average customer affected, and £300m overall.


 

Prohibition of discretionary motor finance commission

As a result of its findings, the FCA launched a consultation in October 2019 proposing new rules that prohibit commission products - where dealers and brokers are given the discretion to change any aspects of the deal that could impact on the total cost of credit to the customer. 

The FCA are therefore seeking to break the link between the commission a dealer or broker earns and the cost of credit to the customer. 

The new rules are expected to be announced in Q2 2020 and come into force in Q3 2020.

Treating Customers Fairly

All of the guidance and publications that have been released by the FSA and FCA provide a clear and consistent message: Firms should aim to deliver the best outcomes for their customers.  Providing the most appropriate products for their needs at the best value.

The remainder of this module focuses on ways to identify and manage the risks associated with incentives, including how firms remunerate their staff.