The UK Financial Conduct Authority Bans Commissions Paid On Car Finance Agreements | Credit Raters

The UK Financial Conduct Authority Bans Commissions Paid On Car Finance Agreements

24 Oct 2019
Approx Reading time: 3 minutes

The UK Financial Conduct Authority has announced a ban on car finance commission following complaints that dealers are exploiting customers. Broker and retailers have received criticism of pushing buyers into high-interest rates as a way of boosting kickbacks.

FCA bans car finance commissions

The decision to ban dealers from earning commission on car finance will save drivers around £275 annually. Therefore consumers will not be subject to bad deals from unscrupulous brokers going forward. The expensive interest rates offered on car financing are a result of the commissions that brokers target. This disadvantages buyers because the expensive rates offered don't match the deals.

The FCA has indicated that the incentive commissions have resulted in dealers and brokers going against consumer interest. The dealers encourage customers to take car finance deals with high-interest rates so that they can receive kickbacks. At the beginning of this year, the regulator conducted a probe into commissions offered on loan agreements.

According to the FCA, over 90% of new car sales in the UK involve some kind of car finance agreement. The FCA has thus estimated that the ban will save consumers up to £165 million annually.

Consumers to receive fair deals

This is because removing the financial incentive for dealers means that there will be no reason to hike interest rates. Also, this will do away with a potential conflict of interest as well as let lenders be in control over the amount customers pay for car finance. As a result, consumers will receive fair deals thus removing any conflict between the customers and salesperson.

For instance, a car finance agreement of around £10,000 increasing commission under the Reducing Difference in Charges model leaves the customer paying more. A customer will pay £1,100 more in four years as interest which is a 50% increase in interest costs. However, if you consider a flat fee model all the costs disappear.

According to FCA strategy and competition director Chris Woolard, it is evident that customers have been losing. This is because of the way lenders are incentivizing brokers and dealers selling car finance. Therefore removing the commission will enhance competitiveness in the market which eventually will save consumers money.

FCA to institute changes on car financing agreements

The FCA wants to institute changes that will let consumers be aware of commissions they are paying. The changes apply to all types of credit brokers besides those in the car finance segment. The regulator will continue consulting until early next year and implementation of the regulation will come towards the end of 2020.

The agency has been reviewing the car finance market for almost two years now following a proliferation of car financing agreements. The agreements had risen from 1.2 million to around 2.3 million in 2017. Equally the Bank of England had warned that the increase in personal contract purchase plans was exploitative of consumers.

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Rebecca White

Rebecca White is chief editor at CreditRaters.com. Rebecca has an extensive amount of knowledge on financial subjects including short-term loans & debt consolidation in the UK and USA. Rebecca has wrote for many publishers such as Debt Secret, My Money, VL and more.