The Financial Conduct Authority (FCA) has confirmed it will be introducing a ban on discretionary commission models in the motor finance industry, following a consultation in October 2019.

Discretionary commission models enable brokers to set and adjust their own interest rates, with inflated rates being passed onto consumers. Preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their motor finance.

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By implementing the ban, the FCA estimates a saving of £165m per year for customers.

In the light of consultation feedback and the additional operational pressures which the sector is facing at present, the FCA has agreed to give firms limited additional time to implement the new rules, with the ban coming into force on 28 January 2021.

Christopher Woolard, the FCA’s Interim Chief Executive, said: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.

“The FCA will also make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information. These disclosure changes apply to many types of credit brokers and not just those selling motor finance. These changes will also come into force on 28 January 2021.”

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Commenting on the FCA’s announcement, Adrian Dally, head of motor finance at the FLA said: “This is a welcome announcement from the FCA as it provides clarity for the industry.  We are also pleased that the regulator accepted our point about the need to monitor the consumer hire market as the ban on discretionary commissions does not extend to personal contract hire agreements.”