Do you understand the new FCA Commission Rules?

The FCA’s ban on ‘discretionary commission models’ and new rules take effect from the 28th January 2021.

The FCA rules on commission models, and on how they should be disclosed to customers are set out in CONC 3 and CONC 4 in the FCA Handbook. The FCA have set out their expectations across two key areas:-

1. Banning pricing models linked to commission.
2. Clarifying commission disclosure rules on all Financial Promotions and Pre-Contract Information to increase transparency to customers.

To help you comply, it is important to understand the FCA’s purpose with the rules, which is to :-

• prevent credit brokers/dealers (including retailers) from being incentivised to set higher interest rates in order to earn more commission;
• incentivise lenders and credit brokers/dealers (including retailers) to create and sell competitively priced loans;
• ensure that consumers receive appropriate and timely information on interest charges and commission, to allow consumers to better engage with car finance options; and
• see customers’ financing costs reduce.

To fully comply with the rules Lender have made changes to its pricing and commission approach.  As a result, you, as a dealer, will find that you will no longer be offered a price model that allows you any discretion to earn different commission rates based on the interest rate offered to the customer. This means that you will no longer be able to decide or negotiate the commission amount. The types of commission covered by the new rules should be interpreted broadly as it covers any commission, fee, or other remuneration payable under a financial arrangement and covers any fee or other financial consideration.

You must now operate within the commission models that your Lenders have set you. The effect of this is to prohibit discretionary commission models and it will be important that you operate within the models set by the Lenders. The new commission models will take effect from 28^th January 2021. Good customer outcomes are central to the new ‘discretion removed’ models.

By now, your Lenders should have shared with you its new pricing and commission structures and agreed with you new rates and terms in advance of the regulatory change date. The old models will have been removed, which means that Lenders will have a closing date of 27 January 2021 where it will have the ability to pay out on the old commission models.  From 28 January 2021 onwards, Lenders will not be able to pay out on old deals and you will need to re-propose under the new commission model agreed.

Commission disclosure

The new commission disclosure rules apply to regulated credit agreement and regulated consumer hire agreements.

What is important to note is that the new disclosure rules contained in CONC 3.7.4 and 4.5 apply to you as the broker/dealer rather than to the Lenders, so it important that from the 28 January 2021 onwards you comply fully with these rules, not only in terms of operating within the Lenders new commission models but by also having in place sufficient disclosures statement on commissions in your own financial promotions and relevant customer pre-contract documentation.

>> Download our FCA Commission Info Sheet <<