The Financial Conduct Authority (FCA) announced its ban on all discretionary commission models that will come into play from January 28th, but it is not the only change that the FCA announcement will create.
The FCA announcement signals three main developments;
- A ban on Discretionary Commission arrangements
- A move to increase transparency on commission disclosure
- A focus on lender ‘oversight’
A ban on discretionary commission pricing models
To quote the FCA; “discretionary commission models are those whereby the amount the broker (dealer) receives (in commission) is linked to the rate that the customer pays and which the broker has the power to set or adjust.” Commission refers to any form of financial benefit accruing to the dealer. In short, dealers will no longer have the discretion to set interest rates on finance that could be used to enhance dealer commission.
Dealers must move their finance and business model away from anything that could be considered to be a discretionary commission model. Traditionally, this was led by so-called DIC (Difference in Charges) and Scaled Commission finance models.
It is over to lenders and dealers to negotiate alternative compliant commission structures. The FCA has referenced some options, including risk based pricing and flat fee models. It will be interesting to see what, if any, viable pricing alternatives surface in the weeks ahead, beyond the two outlined by the regulator.
What are the rules around commission disclosure?
The FCA points to minor changes in commission disclosure. However, since the regulator also points to the fact that their work identified; “a high incidence of firms not complying with some of our existing rules and guidance on the information they should disclose to customers”, dealers would be advised to view that those changes could be significant and even very significant.
I veer towards ‘very significant’ for two reasons:
- According to the FCA during their mystery shopping exercise, many dealers were not complaint with commission disclosure requirement
- Come 28th January 2021, dealers will also have to disclose the ‘nature’ of the commission arrangement and how this impacts the amount payable by the customer
Dealers will need to look beyond the headlines to discover this one. The telling section that underlines an increased responsibility role for lenders is in the FCA’s Measuring Success section of the FCA’s policy statement:
“We will also carry out a point-of-sale mystery shop exercise to measure lenders’ control over dealer networks. This work will assess whether firms, where they are required to, have taken appropriate steps to ensure dealers/brokers comply with relevant regulatory requirements.”
In a world of SM&CR accountability, dealers and lenders will need to collaborate to ensure compliance and assist one another.
What the FCA rules means for dealers
There are risks, but there are also positives for the changes ahead;
Creating a lending environment whereby brokers are not rewarded or incentivised for charging consumers higher interest rates will provide consumers with more confidence in the sector and encourage them to fund their vehicle purchases through dealers rather than utilising other forms of lending such as bank loans.
The overall conclusion is that while many dealers have moved away from discretionary pricing models, they may have to look again and certainly, a review of commission disclosure will need to be on the agenda. A very obvious development will be the role of lenders, quite how they will ensure dealer compliance is unclear, not least of all because of the multi-lender scenario in common usage. Finally, dealers with low finance penetration have much to gain and the position for dealers where finance is a major profit centre will see that this change will continue to provide good outcomes for all.