Motor finance provides an essential lifeline for millions of working families who rely on having the ability to access affordable finance to get a car or van to help them go about their daily business. The BVRLA represents over 400 leasing and leasing broker members, an increasing number of whom offer motor finance.
What are the challenges facing motor finance?
The growth in the motor finance market has been driven largely by the increase in personal leasing, reflecting drivers’ shift from vehicle ownership to usership. Against this backdrop, the Financial Conduct Authority (FCA) announced in its 2017 Business Plan, its intention to look at the motor finance market to ensure that it works well to assess consumer risk.
The review was concluded in March 2019 and the final report can be read here.
What is the latest from the FCA?
The FCA has written to regulated firms outlining their view of the key risks Motor Finance Provider firms pose to their customers and the markets in which they operate. The FCA state that as a regulated firm you should consider the degree to which your firm presents such risks and assess your strategies for mitigating them.
The Financial Conduct Authority (FCA) has consulted on two proposals:
- Ban commission models that give motor finance brokers/dealers an incentive to raise customers’ interest rates
- Amending rules regarding the disclosure of commission to make it clearer when the existence of commission needs to be communicated
The consultation was open until 15 January 2020 and the BVRLA has collated member’s views to form a response. The BVRLA response calls for a longer lead in time for the ban once it is introduced to give members time to make system changes and negotiate contracts and a rewrite of the rules on disclosure of commission to make it clearer who, what and when the rules apply.
The FCA came and presented to the leasing broker committee on 5 November and provided the following information.
FCA Presentation at the Leasing Broker Committee
What are the aims of the FCA’s plans?
The FCA reiterated that the purpose of its plans was to break the link between interest rate and broker commission. The regulator added that it was not seeking proposing to restrict the ability of brokers to set the rate a customer pays but to remove the financial incentive involved. The regulator also clarified that it was not banning any kind of variable payments from lender to broker or from broker to broker. However, if any arrangement had any appearance of a discretionary nature, it would frown upon such arrangements.
With regards to the revised disclosure requirements, the FCA clarified that there was no new obligation to disclose the exact commission amount, but it did expect the customer to be informed if a commission existed and the basis upon which it would be calculated.
What are the timescales for implementation?
The FCA will produce a Policy Statement and revised rules in Q2 2020 (likely to be May 2020). The FCA intends for the ban to come into force three months after the publication of the Policy statement.
Does the ban on commission linked to interest payments apply to personal contract hire arrangements?
No, the FCA have made it clear this is only for commission paid on consumer credit products such as hire purchase or personal contract purchase.
Does this proposal mean the broker has no discretion over the interest rate?
No it doesn’t, the broker can still adjust the interest rate but it cannot be linked to the commission which is earnt.
Is all commission banned?
No, the FCA’s intention is that commission is allowed but it shouldn’t result in poor customer outcomes.
The BVRLA has produced a factsheet on incentives and managing conflicts of interest which contains helpful advice for members who are reviewing their staff incentive schemes.
When is the best time to notify the customer of existence of commission?
The customer should be advised of the existence of commission prior to them making a decision so they are able to make an informed choice from the options available to them.
What are the next steps?
The BVRLA will continue to work closely with the FCA on its proposals and the implementation of them. It will also be formally responding to consultation on behalf of the industry and would appreciate members’ feedback on the consultation questions in order to inform the BVRLA’s response.
We have already flagged concerns around the timescales and that some lenders might require a bit more time to make IT system changes. The FCA stressed that given the urgency to address consumer detriment, it would require very strong reasons why the three-month implementation period would not be sufficient.
Please send your comments and feedback to jeremy@bvrla.co.uk.
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