Last October the FCA opened a consultation on plans to ban discretionary commission arrangements and update the commission disclosure requirements in the Consumer Credit Sourcebook for all providers of consumer credit. James Hinch, senior compliance officer at the NACFB, writes.
The National Association of Commercial Finance Brokers (NACFB) is well placed to respond to the regulator’s request for feedback, and late last year we approached our vehicle and asset finance brokers to gauge and collate their views on the proposed changes.
In short, we believe there was some merit in the Financial Conduct Authority (FCA) looking into the fee arrangements, but we fall short of calling for an outright ban – more on that later in the article. But first, for those not familiar with the proposals, some background:
The FCA reached its decision based on the findings from its initial review. This has raised concerns that the widespread use by lenders of commission arrangements which link fees paid to brokers or dealers to the interest rate paid by a consumer. Such arrangements also allow the same broker and dealer a wide level of discretion to set the interest rate, and gives rise to a conflict of interest that potentially inflicts additional costs on consumers.
The FCA believes it is necessary to ban motor finance commission arrangements that incentivise brokers and dealers to set customers a higher interest rate to earn more commission.
The FCA is also of the view that breaking the strong link between customer interest rates and broker and dealer earnings should decrease financing costs for consumers.
The FCA further observed that the existing rules on disclosure of commission arrangements were both poorly understood and implemented.
It is quite common in business sectors across the economy for firms that act as brokers to set the final price and, therefore, their own profit margin. Equipment dealers do it, travel agents do it, and some retailers do it.
Where regulators get concerned, and again this happens in sectors across the economy, is where firms take advantage of a lack of competition to exploit customers. It has been proven that this can happen at the point of sale in some situations.
Consider the accounts of the motor dealer groups that have historically relied on commission from the sale of insurance and finance to actually make a profit; as a result, they have always tried to ensure the consumer has to take their insurance and finance products. The regulator identified this as an issue some time ago, when it noted that insurance products being sold by motor dealers were invariably more expensive than those offered by other providers, because the dealers were taking more commission. As a result, it banned the sale of conditional insurance products at the point of purchase.
In the asset and insurance premium markets, the regulator has already stated that it does not believe there is an issue, that is because the broker has competition and the consumer will gain a price that not only reflects their financial status, but also the fact that there are probably multiple parties quoting on the same piece of business.
The fundamental difference between these markets and the motor finance market is the dealer’s ability to control who the consumer can deal with.
We think the FCA’s proposals are treating the symptom but missing the cause.
We have encouraged the regulator to review what it did when it saw that motor dealers were dictating pricing in the insurance market. It did not attack the commission structures; it stopped the dealer controlling the consumers choice of provider. This is exactly the same scenario, and we question why the regulator is adopting this stance.
We also relayed that the FCA should not treat all firms carrying out regulated credit broking activity the same. There are two very separate types of firm doing this: car dealers, and motor or asset finance brokers. We have called for a distinction between the two types of firm, pointing out that competition firmly remains for brokers, who will often approach multiple lenders before selecting the right fit for their client.
We further proposed that instead of banning certain fee arrangements, the FCA should seek to increase disclosure requirements of commission models and the commission structure to consumers. For all concerned parties, this will not only support competition within the market, but allow consumers to make more informed decisions and better understand the true cost of the product.
The NACFB met with the FCA in January to discuss its views and share some of the feedback in person. Dialogue with the regulator remains open, and we await its response to our position – a position that we believe further champions the role of the broker.
by James Hinch