The Financial Conduct Authority is considering banning certain commission models in the motor finance sector due to its concerns about harm to consumers.
The final report from the FCA on its review of the motor finance market has been published today, around six months later than it was originally expected.
The FCA said it uncovered “serious concerns about the way in which lenders are choosing to reward car retailers and other credit brokers”.
And it believes some existing obligations around pre-contract disclosure and explanations, and affordability assessments, are not being met by dealers and brokers.
It was worried about commission models which allow brokers and dealers to set the customer interest rate and thus earn higher commission, which can lead to conflicts of interest and consumers paying more for their motor finance.
The FCA is assessing the options for intervening in the market which would address the harm it has identified.
This could include strengthening existing FCA rules or other steps such as banning certain types of commission model or limiting broker discretion.
Jonathan Davidson, executive director of supervision – retail and authorisations at the FCA said: “We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves.
“We estimate this could be costing consumers £300m annually. This is unacceptable and we will act to address harm caused by this business model.”
“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.”
As part of its work the FCA also carried out mystery shopping of firms. The FCA found that where disclosures were given, these were not always complete, clear or easy to understand and as a result customers may not be given enough information to enable informed decisions.
The FCA was also not satisfied that all lenders were complying with the rules on assessing creditworthiness including affordability.
The FCA will follow up with individual firms where failures were identified but expects all firms, both lenders and brokers, to review their policies, procedures and controls to ensure they are complying with all relevant regulatory requirements and are treating customers fairly.