On Monday the FCA issued its final rules concerning discretionary commission models ('difference in charges', or DiC, models) for motor finance dealers and brokers, and also commission disclosures in consumer credit markets.
As ever with FCA announcements, there is plenty of analysis available from advisers and other companies in the market, but I want to highlight some points of particular relevance to asset finance brokers.
1. Non-motor finance commissions aren't directly impacted....
The good news is that DiC is not banned other than for motor vehicles. As I explained in my earlier blog, Why the FCA should apply the SSNIP test to finance broker commissions, DiC generally works well for asset finance customers. It works efficiently to allow brokers to earn an amount commensurate with the level of support needed by their customer.
2. ...but they could be indirectly
Unfortunately, the FCA hasn't acknowledged the potential benefits of DiC in other sectors, and hasn't clarified the rather defamatory way it covered this in its earlier consultation: "We are aware that DIC and similar commission models exist in other markets (for example, asset finance and premium finance). We do not currently have evidence to justify consulting on banning commission models in those consumer credit markets. However, if we identify evidence of harm in other markets, we will consider further interventions.”
This leaves lenders who provide both motor and asset finance in a difficult position. Can they implement the new FCA ban on DiC for motor loans, but disregard the FCA's apparent distaste for DiC when writing business for other assets for regulated customers? The answer should be absolutely, yes, at least for business customers. But I expect some lenders will feel obliged to take the 'safe' option and phase out DiC for asset finance. SMEs will be the worse-off if they do, as the level of support available to them from expert brokers will fall.
3. It is unclear what vehicles are included
The FCA has decided it doesn't need to define 'motor vehicle'. Bizarrely, it justifies this by saying: "Our discretionary commission model ban applies to regulated credit agreements. Agricultural vehicles are likely to be exempt given they are likely to involve credit exceeding £25,000 and entered into by the borrower for business purposes."
This just makes no sense to me. Is the FCA saying that it is only cars and vans? Whatever the type of other assets that could be caught by 'motor vehicle' (agricultural, construction, logistics or others), for an unincorporated business they are, of course, regulated for credit broking purposes, even if the lending agreement is exempt.
Is the FCA saying that the broker can earn commission using DiC for regulated credit broking activities in these cases? Unfortunately I expect some lenders will consider this too vague and risky, and feel obliged to treat all regulated broking of any motorised asset that can be driven on the road as in scope.
4. Brokers are likely to have to explain the DiC model to customers...
Asset finance brokers already need to disclose the existence of commission to regulated customers, other than in unusual circumstances. It is all remarkably vague, and all justified on the highly speculative basis that "the poor disclosure practices we saw in the motor finance review could just as easily occur in other markets". My reading of it is that asset finance brokers will have to explain that their commission will be based on a DiC model (where relevant) and explain how the model works. But it is okay, the FCA tells us that this is a "relatively minor change".
5. ...which is a back door to a requirement to disclose commission value
Although I believe DiC generally works well for business customers, it is not an easy task to explain the model to customers in a few words. Would a business customer be concerned to read about the ability of the broker to set the price (albeit within a very limited range, reflecting the work involved, and mirroring a pricing model that applies in many other business sectors)? To allay any potential concerns and reduce compliance risk, I expect brokers will just find it easier to add to the statement the amount of commission they will earn. I imagine the business customer will then think: "Oh, is that all, so why are you going on about it so much?"
6. Secondary brokers are exempt
Finally, the FCA has clarified that 'secondary brokers' - who sit between motor dealers and finance companies - are not caught by the new commission rules. Confusingly, this is not the same as broking as a secondary activity, the FCA authorisation category. It covers firms such as DSG, Evolution and Mann Island, each of which responded to the FCA's earlier consultation on the rules. The FCA explains that secondary brokers do not set the price of the agreement.
This clarification appears to mean that secondary brokers may continue to negotiate their own commissions with lenders, rather than being tied into a simpler structure such as a fixed amount per vehicle. As car dealers are likely to see their commissions fall, it seems likely more will want to engage with the secondary brokers to reduce their workload and regulatory risk. I expect some asset finance vendor activity will move to a similar model over time.
* This article first appears on Asset Finance Policy's website. Julian Rose is director of Asset Finance Policy and is responsible for compiling the data for the annual AF50 reports on the UK and Europe's largest asset finance providers. He is joint author of the A to Z of Leasing and Asset Finance and also publishes reports on employee costs, impairments, and large UK lessees.