Last week saw the FCA announce some monumental changes to how motor finance and general finance brokers are remunerated for the services they provide, but will they address the problem the regulator identified?
The regulator undertook a review of over 1,000 motor finance transactions from 20 lenders representing around 60% of the market. The review identified that, commission paid to brokers was linked to the rate the dealer/broker was charging and the discretion the dealer/broker had over setting the interest levels meant that they were conflicted, as they were placing their commission payment ahead of the interests of the consumer.
The regulator also stated that this situation appeared to be specific to the motor finance sector, as they had no evidence to confirm that the same issues were happening in the asset and premium finance markets. On the basis that all 3 markets are very similar and in some cases, the same brokers operate in all of the markets highlighted, the question has to be asked; why did the regulator not see the same issues and conflicts across all sectors?
Having operated in the motor, asset and premium finance markets for a number of years, I can say with confidence that the main reason the regulator is seeing this, is because motor dealers and the brokers they work closely with remove competition by imposing barriers that stop consumers placing business outside of their tightly controlled funding panels.
Speak to any asset finance brokerage and you will hear countless stories of motor dealers refusing to invoice 3rd party finance providers and promoting their finance option. So, it should be obvious that they are removing competition, allowing them to dictate the pricing the consumer receives, something you don’t see in the asset and premium markets hence you don’t see the same issues.
The problem now is the regulator is dealing with the symptom but not the underlying problem. Reducing what the dealer can earn, without addressing the control they have over who the consumer can deal with, will only result in the dealer exerting even more pressure over the consumer to deal with the funder that pays them commission, because now they will need to write every deal to guarantee the commission income their businesses rely on.
Surely the regulator would have been better looking at markets that are operating well, ascertaining why they work well and then forcing the motor finance industry to adopt the same standards?
Only time will tell how this move will impact on the consumer experience, but my concern is the fact this will not address the problem specific to the motor finance industry, but it will impact on sectors such as asset finance and premium finance that do not have the same problems, but going forward will incur additional costs in order to meet the new standards.