The Financial Conduct Authority (FCA) has serious concerns about the way in which lenders are choosing to reward car retailers and other credit brokers. 

The findings form part of a report from the FCA on motor finance published yesterday (Monday, March 2).

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, said the FCA.

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 £300 million 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 British Vehicle Rental and Leasing Association (BVRLA) has urged the regulator to take a more active role in supervising lenders, retailers and brokers, stepping in with enforcement where required.

BVRLA chief executive, Gerry Keaney, said: “The time for excuses has passed. There is no place in the motor finance sector for companies that are unwilling to embrace the FCA regime and actively demonstrate their compliance.”  

The regulator also reinforced the need for greater emphasis on affordability assessments and for lenders to take more responsibility in ensuring that brokers are complying with its Consumer Credit sourcebook (CONC).

Keaney continued: “The BVRLA has more than 340 motor finance brokers in membership, who embrace our mandatory code of conduct and governance regime. We would like to see more lenders working with us to improve industry standards and processes.”

The FCA says it 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.

To read the full report, click here.