In a recent development, the Central Bank of Ireland (CBI) has taken a significant step to address concerns in the motor finance market. The CBI issued a “Dear CEO” letter instructing regulated firms to put an end to discretionary commission arrangements (DCAs) in motor finance through hire-purchase agreements. The directive requires firms to discontinue these practices by 31st July 2024 and to review other commission structures to ensure that consumer documentation is appropriately updated.
This move comes following an extensive review conducted by the CBI on commission practices in the motor finance market, with a specific focus on the link between consumer interest rates and commissions paid to credit intermediaries. The CBI’s action mirrors a similar ban by the UK’s Financial Conduct Authority (FCA), which found that DCAs resulted in higher costs for consumers.
Discretionary commission arrangements, as defined by the CBI, allow credit intermediaries to set consumer interest rates with commissions tied to these rates. This structure can potentially lead to conflicts of interest, subsequently resulting in higher costs for consumers. Examples of DCAs include “increasing difference in charges” and scaled models, wherein commission varies based on the negotiated interest rate.
The CBI’s investigation revealed that such commission models are inconsistent with consumer protection requirements and conflict-of-interest regulations. To address these concerns, the CBI proposes to extend the full Consumer Protection Code 2012 (CPC) to hire-purchase and consumer-hire activities.
Regulated firms have been directed to cease linking commission payments to interest rates by 31st July 2024, with board-approved confirmation due by 5th July 2024. Furthermore, firms must review and update all commission structures and consumer documentation by 30th August 2024, reporting the outcomes to the CBI by 30th September 2024.
This measure underscores the CBI’s dedication to consumer protection and emphasizes the need for regulated firms to align their practices with regulatory expectations to ensure fairness in the motor finance market.
In a related development, the FCA in the UK has issued a reminder to motor finance firms to keep their finances in check, as part of its ongoing efforts to regulate the industry. Additionally, the FCA has launched a probe into Discretionary Commission, providing an explanation and shedding light on the regulatory scrutiny faced by such practices.
It is evident that regulatory bodies are taking proactive steps to ensure transparency and fairness in the motor finance market. It is essential for regulated firms to comply with these directives and review their commission practices to uphold consumer protection standards.