Financial Conduct Authority may intervene to prevent excessive motor finance costs

Britain’s markets watchdog is considering banning certain methods lenders use to reward car retailers that cost consumers £300m a year.

The Financial Conduct Authority (FCA) said it found widespread use of commission models which allow brokers discretion to set the customer interest rate and thus earn higher commission, which can lead to customers paying “significantly more” for their motor finance.

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The FCA is assessing the options for intervening in the market to address the concerns, including strengthening existing regulations, banning certain types of commissioning model or limiting broker discretion.

Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, said motor dealers are "over charging unsuspecting customers more than £1000 in interest charges in order to obtain bigger commission payouts for themselves”.

“We estimate this could be costing consumers £300m annually. This is unacceptable and we will act to address harm caused by this business model.

“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.”

As part of its investigation the FCA said it carried out mystery shopping of firms and found where disclosures were given, they were “not always complete, clear or easy to understand”. As a result, customers may not be given enough information to enable informed decisions, it added.

James Fairclough, CEO at AA Cars, said: “It is key that we simplify car finance for the general public and make it more transparent, so customers can make informed decisions.

“Importantly, what shouldn’t be inferred from this report is that there’s a fundamental issue with the finance products themselves – instead the issue is how they are sometimes presented to the public.

“The best thing consumers can do before seeking out car finance is arm themselves with as much information as possible.

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The FCA was also “not satisfied that all lenders were complying with the rules on assessing creditworthiness including affordability”.

The watchdog said it will follow up with individual firms where failures were identified but expects all firms, both lenders and brokers, to review their policies to make sure they are treating customers fairly.

Sue Robinson, director of the National Franchised Dealers Association (NFDA), which represents franchised car and commercial vehicle retailers in the UK, told City A.M.: “Franchised retailers are authorised by the FCA and abide by its rules and guidance. Franchised retailers take rigorous steps to be compliant with consumer credit rules and can only offer car finance under strict conditions.

“NFDA acknowledges the outcome of the FCA’s enquiry into motor finance and urges consumers to visit reputable franchised retailers and shop around before agreeing any finance deals when buying a vehicle.

“Standards and integrity are vital to the future of our sector.”