Changes to Finance Commission Rules on Disclosure
On 28 January 2021, new commission rules will be finally implemented by the Financial Conduct Authority (FCA) following a delay due to Covid-19.
The FCA has decided to change its rules on commissions following the Motor Finance Review published in 2019. The FCA concluded from this review that dealers had too much influence on the finance commissions they earned; did not disclose the existence of commission to customers early enough in the sales process; and that lenders did not have sufficient compliance oversight of their dealer networks.
The FCA has acted by banning certain types of commission models that allowed dealers to flex the commissions they earned in relations to the APR rates charged to a customer. At the same time, FCA also tightened the rules on commission disclosure. Finally, they also tasked lenders with ensuring that their dealers complied with the new rules. Below, we take a closer look at the measures the FCA is putting in place for commission disclosure.
Commission Disclosure
FCA carried out a mystery shopping exercise to evaluate the commission disclosure process in dealerships. From this, they concluded that dealers were either not disclosing the existence of commission to a customer or, if they were, it was far too late in the sales process to be of benefit to them. To address these issues the FCA has tightened rules on commission disclosure.
The new rules on commission disclosure are high level and designed this way deliberately. This gives dealers significant scope on how they make disclosures to customers. Essentially, though disclosure needs to be timely and give details of the nature of your commission arrangements where it might affect a customer’s transactional decision. Disclosure should also be made if an arrangement will impact a dealer’s impartiality when recommending or promoting a lender’s product
There are two stages to commission disclosure:
- Financial Promotions or communications with a customer (e.g. websites, marketing, and emails etc.)
- Disclosure should be made when promoting finance products on websites, in marketing materials and other consumer communications such as emails.
- Pre-contractual information
- Disclosure has to be made to the consumer before any contract is signed. This needs to be in good time before the customer makes a decision to buy. It also needs to be done prominently. Disclosure needs to highlight the existence of commission and its nature of the commission arrangements with the lender. Where any remuneration to the dealer may vary due to specific factors in the commission arrangements the dealer needs to disclose this to the customer. The same applies if there is more than one product available to the customer and there is a variation in the remuneration payable to the dealer.
Disclosure statements
Commission Disclosure statement can be the same for all customers and do not need to be tailored to an individual customer. However, they must include a number of key elements: -
- Identify if working with just one lender or several
- If working with several lenders is there a variation between them in: -
- Commission earned
- Interest rate charged
- Explain the ‘nature’ of commission
- Details (if any) of any promotional scheme
- Mechanics of the commission scheme
Commission Disclosure Examples
Below are some examples of commission disclosure statements. Please note these are generic and may need some tailoring to suit each individual business.
Where a retailer recommends a finance product
We are a credit broker and not a lender. We can introduce you to a limited number of lenders and their finance products which may have different interest rates and charges. We are not an independent financial advisor. We may advise you on the products, subject to your personal circumstances, though you are not obliged to take our advice or recommendation.
We do not charge you a fee for our services. Whichever lender we introduce you to, we will typically receive commission from them (either a fixed fee or a fixed percentage of the amount you borrow).
The lenders we work with could pay commission at different rates. However, the amount of commission that we receive from a lender does not have an effect on the amount that you pay to the lender under your credit agreement.
Where a retailer does not make a recommendation
We are a credit broker and not a lender. We can introduce you to a limited number of lenders and their finance products which may have different interest rates and charges. We are not an independent financial advisor; we will provide details of products available from the lenders that we work with, but no advice or recommendations will be made. You must decide whether the finance product is right for you.
We do not charge you a fee for our services. Whichever lender we introduce you to, we will typically receive commission from them (either a fixed fee or a fixed percentage of the amount you borrow).
The lenders we work with could pay commission at different rates. However, the amount of commission that we receive from a lender does not have an effect on the amount that you pay to the lender under your credit agreement.
Where a franchised retailer has an arrangement with a captive lender (no recommendation given)
We can introduce you to a selected panel of lenders, which includes {captive lender name}. An introduction to a lender does not amount to independent financial advice.
Our approach is to introduce you first to {captive lender name}. If they are unable to make you an offer of finance, we then seek to introduce you to whichever of the other lenders on our panel is able to make an offer of finance to you.
We are not an independent financial advisor; we will provide details of products available from the lenders that we work with, but no advice or recommendation will be made. You must decide whether the finance product is right for you.
Lenders may pay a fixed commission to us for introducing you to them, calculated by reference to the vehicle model or amount you borrow. Different lenders may pay different commissions for such introduction, and {Captive lender name} also provide preferential rates to us for the funding of our vehicle stock and also provide financial support for our training and marketing. But any such amounts they pay will not affect the amount you pay under your finance agreement, all of which are set by the lender concerned.
To support dealers, NFDA has published further guidance; to request the document, please email nfda@rmif.co.uk
