The FCA said it would ban the way that some car dealers and brokers make commission on sales, which it claims gives "an incentive for brokers to act against customers' interests".
Some motor finance brokers receive commission which is linked to the interest rate that customers pay - however, the broker can set that rate. The FCA said that preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance.
However some automotive groups warned that car dealers would have to make up the money through some other method - and said prices could be hiked as a result.
Alex Buttle, director of car selling comparison website Motorway.co.uk, said: “The FCA’s decision to crackdown on how dealers make commission from car finance is timely, but the worry is that some dealers will simply move customer costs onto another part of the transaction.
"If dealers can't make commission from car finance products they may need to make commission elsewhere from other products, or may even need to inflate car retail prices to make the margins they require to survive."
He added: "Saying that, the FCA has recognised an ongoing issue in the industry, and we welcome any changes to financial rules that help protect car buyer’s interests."
The decision follows a consultation held by the FCA into the issue, which will continue until January. It plans to publish final rules next year.
Citizens Advice Scotland’s Financial Health spokesperson, Myles Fitt, said: “The fact that some car dealers increase consumers’ interest rates just so they themselves can benefit from a commission bump is outrageous.
“As motor finance options are on the up through schemes like contract purchases this is the time to make sure consumers are adequately protected against these conflicts of interests.
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 proposing to make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These changes would apply to many types of credit brokers and not just those selling motor finance.