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FCA to require improved Commission Disclosure

One of the more nebulous provisions of CONC which has led to widely different interpretations in practice has been the rule relating to the disclosure of commission found at 4.5.3 which currently provides as follows:

“A credit broker must disclose to a customer in good time before a credit agreement or a consumer hire agreement is entered into, the existence of any commission or fee or other remuneration payable to the credit broker by the lender or owner or a third party in relation to a credit agreement or a consumer hire agreement, where knowledge of the existence or amount of the commission could actually or potentially:

(1) affect the impartiality of the credit broker in recommending a particular product; or

 (2) have a material impact on the customer’s transactional decision”.

In addition, CONC 3.7 requires dealers and brokers in financial promotions and other documents to make clear their status and the extent of their powers, such as whether they work with one or more lenders or independently.

Under the general provisions of CONC these disclosures must be made prominently, clearly and in a manner which is easily comprehensible, and on general principles financiers are required to take reasonable steps to ensure that dealers, brokers and others acting on their behalf comply with CONC requirements such as these.

It has been no surprise to lawyers within the industry that in practice these provisions have become something of a movable feast, and the FCA’s consultation paper on Motor Finance published in March 2019 highlighted high levels of non-compliance with these commission disclosure requirements across the motor finance industry.

Of course such non-compliance was not limited to motor finance, so the whole industry needs to be aware that in its Consultation Paper CP19/28 published in October 2019 “Motor finance discretionary commission models and consumer credit commission disclosure” the FCA has indicated that it intends to strengthen the CONC rules on disclosure of commission across the board and not limited to the motor finance industry.

The main proposals are as follows:

  • Amended CONC 4.5 will require dealers and brokers to additionally disclose the nature of commission, fee or other remuneration arrangements;
  • They must also disclose at the same time how the existence and nature of this may affect the amount payable by the customer;
  • Disclosure may be in general terms and need not be individually tailored;
  • Amended CONC 3.7 will require additional disclosure of the nature of any financial arrangement which might, if disclosed, affect the customer’s transactional decision;
  • This applies where any commission, fee or other remuneration payable under a financial arrangement varies;
  • It also applies where there are two or more credit products the customer could be eligible for.

The consultation period in relation to these proposals ended on 15 January 2020 and it remains to be seen to what extent (if any) the final amendments may be affected by industry comments. The new rules will come into force when the beginning of the FCA’s Q2 policy statement is published.