PS20/8: Motor finance discretionary commission models and consumer credit commission disclosure

Read PS20/8

Why we have changed our rules

Our extensive research into the motor finance sector found that discretionary commission models have led to higher finance costs for consumers. Once firms move away from these commission models, we expect to see consumers’ financing costs reduce.

Firms are also often failing to give customers timely, relevant information. The changes to commission disclosure are relatively minor and designed to be low cost and result in refinements to firms’ existing practices. We believe our changes will make it more likely that consumers get timely information. In turn, this should increase their ability to make more appropriate decisions. These disclosure changes will apply across all credit sectors, not just motor finance.

Who this applies to

Chapter 2 is directly relevant to:

• motor finance providers
• motor finance credit brokers, including motor dealers

Chapter 3 is directly relevant to brokers of regulated credit and consumer hire agreements across all credit sectors.

Chapter 4 is relevant to all the above.

This paper will also be of interest to consumer organisations.

​​​Background to our work on motor finance

In our 2017/18 Business Plan, we announced a review of the sector. In March 2018, we published an update report setting our initial findings. We published the review’s final findings in March 2019.

We found:

• widespread use of commission models that link brokers’ commission to the interest rate charged to the customer, leading to conflicts of interest
• a high incidence of firms not complying with some of our existing rules and guidance on the information they should disclose to customers

Following our consultation in October 2019, we had committed to publishing a Policy Statement in Q2 of this year. However, we put this on hold as part of our publication moratorium in response to the coronavirus (Covid-19) pandemic.

Next steps

Both the ban on discretionary commission models in motor finance and the commission disclosure changes that will apply across all credit sectors will take effect from 28 January 2021. Firms will need to comply by that date.

Although we want to implement the ban as quickly as possible, we have allowed more time for those firms that need it to implement these changes in a compliant way, without the need for quick and potentially less effective fixes. We have considered the impacts of coronavirus on firms when deciding what is reasonable.

What we will do next

We will look closely at any attempt by a motor finance firm to introduce a commission model that could lead to the same harm that we have sought to ban.

We will monitor how well firms comply with the ban on discretionary commission models by carrying out supervisory work across a sample of firms. This work will start in September 2021.

We will also carry out a point-of-sale mystery shop exercise to measure lenders’ control over dealer networks.

We plan to review our intervention in 2023/24.