Risks posed to customers from incentive schemes

The FCA continued 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 its 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and finance providers pay commission to their own staff, and issued a consultation on changes to CONC along with draft guidance.

As part of its exploratory work on motor finance, the FCA reviewed commission arrangements between motor finance providers and dealers. 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

On 28 January 2021, as a result of its final findings, the FCA implemented rules that ban commission, fees and other incentives where:

  • dealers or brokers decide or negotiate the amount of any item included in the total charge for credit for a regulated credit agreement; and
  • the amount of commission, fee or other financial incentive is affected by such changes to the total charge for credit, i.e. there is an incentive for brokers/dealers to change the deal.

The FCA has effectively broken the link between the commission a dealer or broker earns and the cost of credit to the customer.  Commission products that give discretion for dealers and brokers to change the interest rate offered by a finance company,  and receive renumeration based on that rate, have therefore been banned. 


Fair treatment of customers

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 Consumer Duty builds on this by requiring that firms ensure that they deliver fair value to their customers.

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