July 21, 2024
News

Ireland’s Regulator Takes Action Against Unfair Motor Finance Commission Practices

The Central Bank of Ireland (CBI) has issued a directive, mandating the cessation of discretionary commission arrangements (DCAs) in motor finance through hire-purchase agreements. Regulated firms must discontinue these practices by 31 July 2024 and review alternative commission structures to ensure proper consumer documentation.

The CBI’s decision follows a thorough review of commission practices in the motor finance market, specifically focusing on the correlation between consumer interest rates and commissions paid to credit intermediaries. This action aligns with a similar ban by the UK’s Financial Conduct Authority, which found that DCAs resulted in increased costs for consumers.

DCAs, as identified by the CBI, allow credit intermediaries to establish consumer interest rates with commissions linked to these rates. This setup can create conflicts of interest, ultimately leading to elevated costs for consumers. Examples of DCAs include “increasing difference in charges” and scaled models where commission varies based on the negotiated interest rate.

The CBI’s investigation revealed that such commission structures are incompatible with consumer protection requirements and conflict-of-interest guidelines. Consequently, the CBI intends to extend the full Consumer Protection Code 2012 (CPC) to encompass hire-purchase and consumer-hire activities.

Regulated firms are required to detach commission payments from interest rates by 31 July 2024, with confirmation approved by the board by 5 July 2024. Additionally, firms must review and revise all commission structures and consumer documentation by 30 August 2024, reporting the results to the CBI by 30 September 2024.

This initiative underscores the CBI’s dedication to consumer protection, urging firms to conform their practices to regulatory standards to ensure fairness in the motor finance sector.

FCA advises motor finance firms on financial management

Overview: What is Discretionary Commission and why has the FCA initiated an examination?




FAQ

What are discretionary commission arrangements (DCAs) in motor finance?

DCAs in motor finance allow credit intermediaries to set consumer interest rates with commissions tied to these rates, potentially leading to conflicts of interest and increased costs for consumers.

Why is the Central Bank of Ireland mandating an end to DCAs?

The CBI has identified that DCAs are inconsistent with consumer protection requirements and conflict-of-interest regulations, prompting the directive to cease these practices in the motor finance market.

What actions are regulated firms required to take in response to the CBI’s directive?

Regulated firms must detach commission payments from interest rates by 31 July 2024, review and update all commission structures and consumer documentation by 30 August 2024, and report the outcomes to the CBI by 30 September 2024.

Conclusion

The Central Bank of Ireland’s decision to eliminate discretionary commission arrangements in motor finance signifies a commitment to consumer protection and fair practices in the industry. Regulated firms must swiftly adapt to the new regulations to ensure transparency and equity for consumers.

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