FCA motor finance update: broker incentivisation where the level of commission is linked to the interest rate charged is an area of concern

Last year, the FCA announced that it would be undertaking a review into the motor finance market given its continued growth in recent years, to ensure it works effectively and minimises the risk of consumer harm.

In March 2018, the FCA published an update on its review of the motor finance market. Its review was focussed on a number of key issues, including whether:

• firms are adequately managing the risk that asset values could fall and are pricing risk accordingly;
• firms are lending responsibly and assessing affordability appropriately;
• there are any conflicts of interest arising from commission arrangements between lenders and dealers and if so, whether these are being appropriately managed to avoid any detriment to consumers; and
• the information provided to consumers is sufficiently transparent.

The FCA's provisional conclusions are relatively positive, noting that whilst lending in the motor finance sector has grown, broadly due to the increase in consumers financing their cars on personal contract purchase agreements, arrears and default levels on the whole remain low. In addition, the FCA notes that the largest lenders in the sector have relatively robust risk management processes in place in relation to asset valuations.

The FCA is, however, keen to further investigate how lenders are assessing customer affordability, particularly for higher credit-risk customers and whether firms are adequately complying with the requirements in CONC. The FCA is also keen to understand what commission arrangements lenders have in place with their dealers, as they are aware that commission structures that are directly linked to the interest rate payable by the customer may be incentivising inappropriate higher-rate lending. The quality and transparency of information provided to consumers in both customer-facing documentation and on lender and dealer's websites is also under review. Separately, the FCA is conducting a mystery shopping exercise looking at whether consumers are provided with adequate information at the point of sale.

The FCA expects to complete its review of the motor finance market by the end of September 2018 and will publish any areas of concern and action it wishes to take following on from this.