UK watchdog may ban some practices in car finance market

FILE PHOTO: The logo of the new Financial Conduct Authority (FCA) is seen at the agency's headquarters in the Canary Wharf business district of London April 1, 2013. REUTERS/Chris Helgren/File Photo

LONDON (Reuters) – Britain’s markets watchdog said it may ban some methods used by brokers to reward car dealers that end up overcharging an estimated 560,000 customers about 300 million pounds a year.

The Financial Conduct Authority said it found widespread use of commission models that allow brokers discretion to set the customer interest rate and thus earn higher commission.

“We found that some motor dealers are overcharging unsuspecting customers over 1,000 pounds in interest charges in order to obtain bigger commission payouts for themselves,” said Jonathan Davidson, executive director of supervision for retail at the watchdog.

“We estimate this could be costing consumers 300 million pounds annually. This is unacceptable and we will act to address harm caused by this business model,” Davidson said.

The watchdog said it was assessing options for intervening in the market, which could include strengthening existing FCA rules, banning certain types of commission model, or limiting broker discretion.

It will follow up with individual firms where failures were identified, and expects all firms in the sector to review their policies, procedures and controls.

Adrian Dally, head of motor finance at the Finance & Leasing Association trade body said the FCA’s work on commission structures is based largely on out-of-date information and does not reflect the progress made in moving away from them.

“We look forward to working with the FCA as it modernises its regulations in line with market best practise,” Dally said.

The National Franchised Dealers Association said its members take rigorous steps to comply with consumer credit rules, and it urged consumers to visit reputable retailers and to shop around.

The watchdog estimates that on typical motor finance agreement of 10,000 pounds, higher broker commission under a so-called “difference for charges” model could mean the customer is paying about 1,100 pounds more in interest charges over a four-year agreement.

“It is not clear to us why brokers should have such wide discretion to set interest rates or to adjust the rate to, in effect, pay themselves more commission,” the FCA said.

Sarah Nield, risk and regulation director at consultants PwC, said that “if affordability checks become harder and PCP (Personal Contract Purchase) numbers drop, manufacturers must think about the impact on new car production volumes.”

The FCA first announced in July 2017 it was looking at how consumers use the motor finance market to buy a car by examining millions of credit files and conducting “mystery shopping” exercises.

The watchdog found that customers were not always being given enough information to make informed decisions about buying a car. It was not satisfied that all lenders were complying with the rules on assessing if a customer could afford to buy a car.

(Reporting by Huw Jones; Editing by Keith Weir and Louise Heavens)

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