Last year, research by the Financial Conduct Authority (FCA) revealed that discretionary commission models were driving up finance costs for consumers. Firms were also failing to provide timely, relevant information. Subsequently, the FCA decided to ban discretionary commission models, while implementing new rules surrounding commission disclosure. Hannah Wright reports.

While the FCA will investigate the success of the changes in September 2021, finance broker, Evolution Funding, recently hosted a webinar to look at the impact on the customer experience, and the effect on rates, finance penetration and commission earning.

The general consensus from the seminar was that the recent FCA changes to commission models for motor finance have been a welcome change for customers and dealers.

To comply with the ban, finance firms have been negotiating alternative commission structures. Explaining the implications for Evolution Funding, chief executive Lee Streets says: “In response to the discretionary commission ban, we introduced two new prime pricing models. One is a fixed APR for prime customers, with no variable rate at all.

“The other is Credit Score-based Pricing (CSBP), which is a varying APR based on the customer’s credit score, unified across multiple lenders. We work with several different introducers, so in January we had to migrate over 2,500 dealer packages to one of these two options.”

Of the two prime pricing models discussed – Fixed APR and CSBP – 60% of dealers have opted for Fixed and 40% for CSBP. Following the implementation of the changes, Fixed APR has seen insignificant change in average APR and customer credit score, and an increase of £17 per case in average commission.

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Conversely, CSBP has led to a drop of nearly 0.4% in average APR, a 16-point increase in credit score and an increase of £42 per case in average commission, which was in part helped by an increase in average advance.

Beyond the introduction of the new prime pricing models, Evolution has also had to make changes to regulatory disclosures, in line with the FCA’s new CONC rules. The new rules are intended to ensure consumers have a better knowledge of dealers’ finance commission and are more likely to engage with what is on offer.

Streets adds: “We amended the Evolution Funding Initial Disclosure Document (IDD), and we strengthened the message on both the existence and the nature of commissions. We now tell consumers they can obtain the amount of commission on request. We even sign post them as to how they might do that.

“We added three additional questions within our compliance journey, so the consumer now confirms the retailer has given the IDD or disclosures. The consumer also confirms that they have read the IDD and must confirm they understand the existence and nature of commissions.”

Reactions to the changes

According to Streets, Evolution sought feedback from many of its retail partners to see how they have been viewing the changes.

Europa Sheffield says it seemed to “give sales execs more confidence selling to customers, knowing the rate is down to the customers profile,” while Bridgend Ford believed that “knowing we offer a lower rate to customers whose credit profile warrants it, finance penetration increases”.

The crucial word, across all the feedback, is transparency. Streets continues: “It is very easy to deal with a customer now the haggling and negotiations have been removed. There is also some sentiment that the ban has helpfully removed unnecessary discounting by salespeople. One consumer has called out that the process is more transparent, but in fact, many of our consumers are benefitting from lower rates.

Andrew Brameld of BNP Paribas Personal Finance agrees: “From a lenders perspective, we have a similar view towards the transition. It has gone smoothly overall. Most of our dealers have gone onto a fixed rate, but we are working with a number now on more risk-based pricing, evolving into that space very carefully.”

One positive, Brameld pointed out, was the declining propensity for salespeople to discount rates, which has subsequently improved earnings.

Speaking on behalf of Virtu Motors, Steve Rowe, finance and insurance director, explains the case for his firm: “We are running CSBP, but we do have one manufacturer that has chosen to remain fixed. From a CSBP perspective, we have seen an increase in earnings and penetration.”

The key takeaways, Rowe notes, are the increased consumer confidence and reduced stress for the sales team: “The stress of negotiation has been removed, allowing for a much more confident approach. We’re off to a great start, but it will be interesting to see how it evolves when things start to open. Currently for us, it’s very positive.”

When asked how customers were responding to the inability to discount, Rowe responds: “Certain customers will always want some form of discount but if you position the credit-based pricing as relative to the customer themselves, then most of the time, customers are more accepting that the indicative rate we’re quoting is personal to their circumstances. It really comes down to how you position the financing in the offer.”

Open to interpretation

Despite significant changes to regulatory disclosures and industry warnings that dealers must prepare for a greater level of consumer interest in finance commissions, the number of customers making commission disclosure requests was negligible.

According to Streets: “Since Evolution Funding made these changes, we have processed around 8,000 customers through this journey and have only had one customer request the commission details since the changes were implemented.”

However, the panel expressed concerns over the size and variations of commission disclosure wording, questioning whether consumers might be disengaging due to information overload.

Indeed, Brameld believes that there is significant ambiguity surrounding commission disclosures. He commented: “Having spoken to several dealers, there is a lack of consistency in what must be said and done, and there does not seem to be a particularly strong industry approach yet. The changes have bedded down very well but the consistency isn’t there yet.”

According to Brameld, the FLA have provided wording on commission disclosures, but there has been mixed interpretation from the dealers and the industry as to where they include it in the customer journey.

Brameld explains: “Some believe it’s fine to put it in the consumer credit agreement for the customer, while others believe that is too late – you need to provide it in the showroom. That’s also our view, as it ensures the customer is aware of the commission.”

MotoNovo also recently warned that commission disclosures must be prominent and sufficiently detailed for consumers, or risk facing action from the FCA.

The recently implemented FCA rules on commission disclosure provide significant discretion on how disclosures are made. However, the authority has warned that a lack of prominence at the crucial stages places dealers at risk of potential FCA action and claim management companies (CMC) campaigning activities. One particular CMC is currently campaigning across social media that: “Qualifying PCP holders are claiming £1,000s due to undisclosed commissions on their car deal.”

Rowe believes that certain lenders have veered away from the recommended wording, providing adapted versions open to different interpretations.

In search of a solution, Rowe adds: “We partnered with the FLA to try and get an agreement on commission models, but we couldn’t align completely because we saw things differently. However, we are working with them on commission disclosure wording.”

Rowe concludes: “We have all drawn a line in the sand, concerning what we think is the right approach, but over the coming months we will get to a more consistent message.”

Awaiting review

Jo Davis, co-founder of Auxillias, a specialist legal and compliance firm, believes the industry has been conservative in opting for two models – fixed rate and CSBP. Davis comments: “From the FCA perspective, the CSBP links to the affordability, which is one of the challenges we have to be mindful of.”

Due to lockdown restrictions, most transactions since the implementation of the changes have been taken online. Davis continues: “We have not had that many point-of-sale finance transactions to gauge whether it is actually working for the customers, and to identify any potential consequences or consumer harm. It’s very early doors to check whether those outcomes are where we want them to be.”

Turning to the review, scheduled for September this year, Davis saya: “We will be looking for discretion creep. If at that point, there is a good indication of how these models are working, it might well be that they change. The most important thing is that there is no discretion creep. Dealers cannot be coming back to the lenders asking for another rate.”

What it comes down to, Davis states, is consumer harm. When the FCA conducted their review, far too much money was being paid in commission, and it was coming from the consumer. If that is still happening under the new model, and we are not achieving the outcome we want, it will be clear in the September review.”

According to Davis, other models are being piloted, such as the rate corridor, to see how they fare. “In its paper, the regulator has been very clear that they expect us to set the models and make sure there is no discretion creep.”

Injecting optimism back into the discussion, Streets believes the changes represent a significant opportunity, with both brokers and secondary brokers having a role to play in the market.

Echoing the importance of balancing retailer needs in terms of commissions, Streets reinforced the importance of righting the industry’s wrongs. “We didn’t ask for these changes, but it’s a once in a generation opportunity from a point of sale to become a transparent and dynamic offering to the market.”