FCA to decide soon on motor finance commission models

FCA to decide soon on motor finance commission models

It came as no surprise when the Financial Conduct Authority (FCA) announced that car dealers and motor finance brokers will likely be banned from receiving commission linked to interest paid by the consumer.

The FCA is consulting with the motor finance brokers on whether to push through an all-out ban on the payment of sales commissions on F&I product sales until 15 January 2020. The regulator will publish final rules by the middle of next year.

The regulator has been investigating the car finance market for over two years, originally outlining a plan to review the automotive market in their business plan of 2017/18.

According to the Financial Times “the FCA’s action comes after car finance agreements in the UK increased from 1.2m to 2.3m in 2016, enabling British customers to borrow a record £31bn.”

The near doubling of the mostly PCP contracts underpinning new car purchases in just one year was bound to attract the attention of the regulator – even if it’s taken them nearly three years to act.

The FCA’s interim report published back in March 2018 uncovered widespread use of commission models that link brokers’ commission to the interest rate charged to the customer and high incidences of firms not complying with existing rules and guidance on the information they should disclose to customers.

Since then the FCA has concentrated on developing new rules designed to regulate the motor finance market. Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance.

“By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”

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Car buyers to save £165m under motor finance clampdown

Car buyers to save £165m under motor finance clampdown

Motorists are set to save around £165 million a year under plans to ban salesmen and brokers from charging some types of commission on car financing deals.

Britain’s financial watchdog is proposing a crackdown to stop car retailers and brokers from charging commission linked to the interest rate that customers pay on loans to buy motors.

The Financial Conduct Authority (FCA) said they can increase the interest rate charged to boost their commission, which “creates an incentive for brokers to act against customers’ interests”.

The FCA said it believes scrapping this type of commission would remove this potential conflict of interest and give lenders more control over the prices customers pay for their motor finance.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance.

“By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”

The FCA is also looking to overhaul the way customers are told about the commission they pay to make information clearer and more relevant, which would apply to many types of credit brokers as well as those selling car finance.

It will consult on the plans until January 15, with final rules set to be published later in 2020.

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Buyacar advises motorists to steer clear of PCP-funded options

Buyacar advises motorists to steer clear of PCP-funded options

Buyacar has advised car buyers to steer clear of costly options funded by a PCP finance plan – branding the resulting uplift in monthly payments a “rip-off”.

Analysts at the online motor retail specialist calculated that adding optional extra features to cars financed on PCP adds disproportionately to monthly payments.

While the findings were damning, however, it highlights an opportunity for car retailers to guide customers towards a higher-specification vehicle that includes their desired additions as-standard.

Austin Collins, the managing director of BuyaCar, said: “Although PCP finance has made new cars more affordable to ordinary people than ever before, there are still aspects of personal contract purchase which do not always represent the best value buyers could get for their money and option costs are one of them.

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Millions of drivers could be owed compensation for unaffordable and expensive car finance deals – here’s how to claim

Millions of drivers could be owed compensation for unaffordable and expensive car finance deals – here’s how to claim

MILLIONS of motorists could be owed compensation for car finance deals that are unaffordable or come with high commission rates.

A few weeks ago, an investigation by the city watchdog found that half a million people with car finance deals are being stung by £1,100 in extra charges by firms trying to make commission.

This report could eventually enable customers to claim refunds – similar to the how the PPI mis-selling scandal has hit banks with huge compensation bills, according to consumer rights experts.

The Financial Conduct Authority (FCA) warned that 560,000 customers could be paying a combined £300million more in interest – or 50 per cent more than they need to.

Its sample size was based on 60 per cent of the loans market, which means the issue is likely to be even bigger.

Even worse, many firms are so keen to sign PCPs, or personal contract plans, that buyers are not given enough time to properly understand the full details of their contracts.

The FCA said it would follow up with individual firms using these tactics, but in the meantime customers can still try and claim compensation. Below we explain how.

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Car buyers overcharged £1,000 by dealers for loans, says watchdog

Car buyers overcharged £1,000 by dealers for loans, says watchdog

Some car buyers are being overcharged by more than £1,000 when they take out a loan to buy a car, the UK’s financial watchdog has warned.

The Financial Conduct Authority (FCA) said the industry practice of allowing dealers to set their own interest rates was costing consumers £300m a year.

Dealers overcharge to boost their commission, the FCA concluded.

But the Finance and Leasing Association said the watchdog’s survey was “based largely on out-of-date information”.

Conflicts of interest

The regulator launched its investigation into the car finance market in April 2017 after there was a rapid surge in consumer credit led by car dealership finance.

At the time, it said it was concerned about a lack of transparency and potential conflicts of interest.

In its final findings on motor finance, the FCA concluded that the widespread use of commission models, which allow brokers discretion to set the customer’s interest rate and thus earn higher commission, can lead to conflicts of interest that are not controlled adequately by lenders.

It said the practice can lead to customers paying significantly more for their motor finance.

Jonathan Davidson of 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 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.”

Read the full story on the BBC website

Our work on motor finance

Our work on motor finance

Consumers’ use of motor finance has grown rapidly in recent years, with many credit products now available.

As we set out in our Business Plan 2017–18, we are looking at this market to develop our understanding of these products and how they are sold, and to assess whether the products cause harm to consumers and if the market is functioning as well as it could.

In March 2018, we published an update on our review of the motor finance sector (PDF), setting out our findings so far and the areas of concern that we will focus on for the remainder of our review, which will be completed in September 2018.

The market for motor finance

Since publishing our Business Plan, we have continued our work to identify potential areas of consumer harm in the motor finance market.

The majority of new car finance is now in the form of Personal Contract Purchase (PCPs), a form of Hire Purchase. The key feature of a PCP is that the value of the car at the end of the contract is assessed at the start of the agreement and deferred, resulting in lower monthly repayments.

PCPs provide the flexibility to own the car at the end of the agreement by paying the deferred value (‘Guaranteed Future Value’, GFV), or to enter into a new agreement (using any equity built up over the course of the existing agreement). The consumer also has the option to simply give the car back, but they will often incur any excess mileage and/or damage costs.

Consumers may also be approached prior to the conclusion of their PCP agreement with the offer of entering into a new agreement, if equity has been built up. We have found that this is a key driver for brand loyalty that many customers find attractive.

The Prudential Regulation Authority notes(link is external) that a PCP agreement creates an explicit risk exposure to a vehicle’s GFV for lenders. We consider that direct consumer risk exposure may be more limited, but may be heightened where there has been an inadequate assessment of affordability and/or a lack of clarity for the consumer in their understanding of the contract.

Although PCPs are popular with consumers, they are obviously not the only form of motor finance and remain less prevalent in used car sales. We have identified an extensive range of products across the market: some based on ultimate vehicle ownership (either as an option, or a condition); and others based on ‘usership’, with no requirement to purchase.

We also recognise that the terminology used in the motor finance market is not universal and may be confusing. We consider it essential that consumers understand the risks and particular features of the motor finance they are taking on.

We have established that lenders may apply price and commission caps on their broker/dealer partners, and that new car offers/promotions are often heavily supported by manufacturers (often with fixed rates of interest). For used car sales, particularly where there is no finance subsidy or deposit contribution, there may be a greater risk that the finance aspect of a car purchase is used to generate a margin on the sale.

Read the full story on the FCA website