The FCA says that commission creates an incentive for brokers to act against customers' interests
The UK financial watchdog is banning car retailers and brokers from taking commission sales linked to interest rates, potentially saving buyers £165 million a year.
Some motor finance brokers receive commission which is linked to the interest rate that customers pay.
The Financial Conduct Authority (FCA) has found that when brokers are able to set the rate this creates an incentive for them to “act against customers’ interests”.
The FCA estimates the changes would save customers £165 million a year.
The financial watchdog says that banning commission would remove the financial incentive for brokers to increase the interest rate and give lenders more control over the prices customers pay for their motor finance.
Christopher Woolard, executive director of strategy and competition at the FCA, says: “We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance.
"By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”
The FCA is also proposing to make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information.
These changes would apply to many types of credit brokers and not just those selling motor finance.
The watchdog is consulting on the new rules until 15 January 2020 and plans to publish final rules later in in the year.
Earlier this year the FCA found that on a typical motor finance agreement of £10,000, higher broker commission can result in the customer paying around £1,100 more in interest charges over the four-year term of the agreement.
Keith Richards, chief executive of the Personal Finance Society, says: “We support the FCA’s proposals to ban commission where there is an evident bias to overcharge a consumer to rack up remuneration for both the provider and broker.
“Commission can work well in some cases but it can also be the cause of poor advice and unfair deals for the public.
“There is little doubt that fixed fees or charges are more likely to be introduced in the future as commission in all areas of Insurance and financial services continues to come under regulatory scrutiny.”
What should you do if you think you have been overcharged?
If unhappy with your credit agreement you should contact the dealer/lender you took it out with.
If you are still not happy and wish to escalate your complaint you should then contact the Financial Ombudsman Service.