The Financial Conduct Authority (FCA) said it is considering changes to the way in which commission works after uncovering “serious concerns” about the way lenders are choosing to reward car retailers and other credit brokers.
It found 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” which are not controlled adequately by lenders.
This can lead to customers paying significantly more for their motor finance, the FCA said, and is costing car buyers more than £1,000 a year, or £300 million collectively.
Jonathan Davidson, the regulator’s executive director of supervision, 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. It 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 regulator said it was assessing its options for intervening in the market, including strengthening existing rules or other steps such as banning certain types of commission model or limiting broker discretion.
In response to the FCA’s findings, Sue Robinson, director of the National Franchised Dealers Association (NFDA), which represents franchised car and commercial vehicle retailers, said the industry abided by strict rules.
She said: “Franchised retailers take rigorous steps to be compliant with consumer credit rules and can only offer car finance under strict conditions.
“NFDA acknowledges the outcome of the FCA’s enquiry into motor finance and urges consumers to visit reputable franchised retailers and shop around before agreeing any finance deals when buying a vehicle.
“Standards and integrity are vital to the future of our sector.”