UK finance authority uncovers serious concerns in motor lending

4 March 2019

The UK’s Financial Conduct Authority (FCA) is considering changes to how commission works in the motor finance sector following the publication of an investigation into the market.

The authority has said it uncovered serious concerns about the way in which lenders are choosing to reward car retailers and other credit brokers. The FCA found that the widespread use of commission models, which allow brokers discretion to set the customer interest rate and thus earn higher commission, can lead to conflicts of interest which are not controlled adequately by lenders. This can lead to customers paying significantly more for their motor finance.

The FCA analysed contracts between lenders and dealers from 2013 to 2016 and examined lenders’ data from January 2017 to July 2018. It announced the review in July 2017.

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 to obtain bigger commission payouts for themselves. We estimate this could be costing consumers £300 million (€349 million) annually. This is unacceptable, and we will act to address harm caused by this business model.’

The final report found that incentives have significant effects on the cost of motor finance for consumers, even after controlling for other factors which might affect interest costs, such as the customer’s credit score, loan value or length of the agreement. For commission models where the broker has discretion over the interest rate, increases in broker commission are associated with higher increases in interest rates, particularly for difference in charges (DiC) models.

The FCA estimates that on a typical motor finance agreement of £10,000 (€11,648), higher broker commission under the Reducing DiC model can result in the customer paying around £1,100 (€1,281) more in interest charges over the four-year term of the agreement.

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 have 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.

Additionally, the authority will also assess options for intervening in the overall motor finance market. Options include strengthening existing rules or other steps such as banning certain types of commission model or limiting broker discretion.