Commission linked to car finance banned by the FCA which could save save motorists £165m a year

  • Car finance brokers won't be allowed to charge a commission based on the interest rate that customers pay on their car loans from 28 January 2020
  • The ban is expected to save motorists some £165m a year, the FCA said 
  • Around nine in 10 new cars in Britain are bought on finance

By CAMILLA CANOCCHI FOR THISISMONEY.CO.UK

Updated:

Britain's financial watchdog will ban commissions linked to car financing from next year in a move it says will save motorists around £165million a year.

The Financial Conduct Authority will introduce a ban on car sellers and brokers charging commission linked to the interest rate customers pay on loans to buy cars from 28 January 2021.  

The ban, which had already been announced in October last year, comes as brokers can currently charge a commission based on the interest rate that customers pay on their car loans.

Banned: From January next year, brokers won't be allowed to charge a commission based on the interest rate that customers pay on their car loans

Banned: From January next year, brokers won't be allowed to charge a commission based on the interest rate that customers pay on their car loans

But such commissions give motor finance brokers and dealers 'an incentive to raise customers’ finance costs' - in other words, to push them towards more expensive loans so that they can get a bigger commission. 

Scrapping the 'widespread use' of this commission, the FCA says will remove the financial incentive for brokers to to increase interest rates a customer pays. 

The move will affect many customers, as around nine in 10 new cars in Britain are bought on finance, on average.

'Our extensive research into the motor finance sector found that discretionary commission models have led to higher finance costs for consumers,' the FCA said.

Quick car finance guide 

Personal loan: A loan for a set amount not secured on the car or anything else. Often cheaper from a bank than a car finance specialist.

Hire purchase: The car's cost is gradually paid off by the buyer with interest. At the end they own the car. If they default the car is repossessed.

Personal Contract Purchase (PCP): The buyer pays a set monthly amount over a period of time, based on the car's expected depreciation. At the end of the period they are likely to have a lump sum balloon payment, if they want to take ownership. Alternatively, they can hand the car back. If they default on payments the car will be seized.

The watchdog's boss Christopher Woolard added: 'By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.

'We estimate that consumers could save £165million because of today's action.'   

Under the new rules, customers will also be able to expect to get more relevant information in the way that commissions are paid. 

'The changes to commission disclosure are relatively minor and designed to be low cost and result in refinements to firms' existing practices,' the FCA said.

'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.'

The FCA has been looking into the issue since 2017 as part of an investigation into the practices in the motor finance industry. 

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