Blog: Brokers needn't fear FCA commission reforms

The Financial Conduct Authority is taking a very dim view of car finance brokers adding a gross rate to a finance company’s net rate. This is because the borrower could be getting a different rate from the same lender when it goes to two different car finance brokers. With the FCA’s attention firmly on commission disclosure under the long-awaited Insurance Distribution Directive, it’s not a stretch to see how the same scenario would apply to insurance brokers. 

Responses to the FCA’s consultation document on the Directive must be submitted by 22 May. While mandatory commission disclosure is not currently being called for, a new rule will require parties “to act honestly, fairly and professionally in the best interests of their customers” and intermediaries will also have to explain the “nature and basis” of their remuneration.

Most brokers currently add a gross commission rate onto the premium finance company’s net rate as standard practice, and rates differ between brokers. Given the recent experience in the motor intermediary finance market, would the FCA deem this unfair for the consumer? What might the changes be and if gross rate commissions are banned, what impact will it have on brokers? Given that it isn’t uncommon for 50% of brokers’ pre-tax profits to come from finance arrangements today, such a ban on commissions earned from premium finance arrangements alone could pose a serious threat to brokers’ income.

The pressures on brokers are mounting, both from rising costs and increased regulation. Rising insurance premium tax and FSCS levy, the discount rate, the threat to the broker market from fintech and aggregators… it all eats away at brokers’ profitability, and there’s only so much that commissions can be tweaked to compensate.

If the FCA bans or restricts gross rate commissions on finance arrangements, brokers will need to claw back that income elsewhere, to look creatively at bespoke finance agreements and bringing the function in-house and cut out the middle man. This might sound like a leap but bringing premium finance in-house will give brokers back control over how the finance is structured and give them a bigger slice of the pie.

The FCA is quite rightly keen that brokers justify the commission they make on finance. Providing their own premium finance facilities will mean brokers have access to all the management information and justification they need to charge appropriate fees and interest for providing their facility. Brokers can, therefore, protect their income from premium finance business. This is just one way that additional income could be legitimately and transparently earned.

Bexhill believes in transparency and fair commission but the problem comes with those few brokers that take advantage of the system. The FCA will quite rightly put a stop to eye-watering overinflated commissions. But for the majority of brokers that will lose income from quite legitimate gross commissions charged, be reassured: there are other ways to earn that income, whether that’s through value-added products or in better, smarter ways of working with ancillary services, including premium finance.

The changes being introduced by the FCA on commissions are just one of the many challenges that brokers are facing today. We are entering a brave new world and brokers are having to adapt and evolve in so many ways to stay relevant. So embrace change and prosper!