Following the FCA taking action to introduce a ban on discretionary commission models, and subsequent to a consultation in October 2019, firms have until Thursday 28th January 2021 to make changes to their processes and documentation to comply with the new requirements.
Why the change?
The FCA identified that some car retailers and motor finance brokers received commission linked to the interest rate that customers pay, which created an incentive to sell more expensive credit to customers. This was contrary to the interests of the customer and did not allow for fair outcomes to be achieved in all cases. The FCA have made these changes to reduce consumers’ financing costs and predict it will save consumers £165 million per annum.
Does this impact my firm, even if I do not provide access to motor finance?
Changes to regulatory requirements will apply to all brokers of regulated credit and consumer hire agreements. Specifically, as a result of an amendment to CONC 3.7.4G, all brokers will be required to disclose information to customers in respect to the nature of commissions within their financial promotions, as well as when making a recommendation to a customer.
Further clarification is provided via an amendment to CONC 4.5.3R, which confirms that the existence and nature of commission arrangements where the commission varies depending on the lender, product or other permissible factors should always be disclosed prominently. The disclosure must also cover how the arrangements could affect the price payable by the customer. All such disclosures must be provided prominently to customers.
What do I need to do to comply? How is the NACFB helping me prepare?
The NACFB have developed a revised Terms of Business (ToB) template and suitability letter for use by all members from 28th January 2021 (or before, if desired). The changes made to the templates incorporate wording to provide transparency on the nature of commission models and how any recommendations made may be affected by different commission models available from the various lenders who are deemed suitable for the customer of the firm.
Specifically, the Terms of Business template now requires (in Section 3) customers to acknowledge that commissions paid by lenders vary and that broker firms commit to provide information to the customer in relation to the amount or the level of commission paid and the nature of the commission model in place, where known to the broker at the time of the proposal. Other minor amendments have also been made to the wording, enabling terms to be more easily understood.
Further, to compliment the revised Terms of Business, the NACFB have developed a revised suitability (see, reasons why) letter to meet the new requirements. The revisions enable firms to provide full disclosure information to customers in all cases, in a manner which complies with the requirements. Specifically, in the ‘options considered’ section, new sections have been added, requiring Member firms to provide a summary of the ‘nature of financial arrangement between lender and broker’ and an indicator for the benefit of the customer as to how the commission varies between each option.
These changes have been made to keep compliance with the revised regulations as simple as possible and firms can access the revised templates via the compliance section of the NACFB website.
What can my firm expect next?
The FCA will monitor how well firms comply with the ban on discretionary commission models by carrying out supervisory work across a sample of firms. This work will start in September 2021 and may well include an assessment of compliance with the revised disclosure requirements, which are applicable to all broker firms. The NACFB will be actively monitoring compliance of the membership during our ongoing assessments of Member firms.