By Huw Jones
LONDON (Reuters) - Britain's markets watchdog said it may ban some methods used by brokers to reward car dealers that end up costing an estimated 560,000 customers about £300 million a year.
The Financial Conduct Authority said it found widespread use of commission models that allow brokers discretion to set the customer interest rate and thus earn higher commission.
"We found that some motor dealers are overcharging unsuspecting customers over £1,000 in interest charges in order to obtain bigger commission payouts for themselves," said Jonathan Davidson, executive director of supervision for retail at the watchdog.
"We estimate this could be costing consumers £300 million annually. This is unacceptable and we will act to address harm caused by this business model," Davidson said.
The watchdog said it was assessing options for intervening in the market, which could include strengthening existing FCA rules, banning certain types of commission model, or limiting broker discretion.
It will follow up with individual firms where failures were identified, and expects all firms in the sector to review their policies, procedures and controls.
The watchdog estimates that on typical motor finance agreement of £10,000, higher broker commission under a so-called "difference for charges" model could mean the customer is paying about £1,100 more in interest charges over a four-year agreement.
Brokers were earning about £2,000 in commission under the different models being used, compared with £700 if a flat fee was charged.
"It is not clear to us why brokers should have such wide discretion to set interest rates or to adjust the rate to, in effect, pay themselves more commission," the FCA said.
The FCA first announced in July 2017 it was looking at how consumers use the motor finance market to buy a car by examining millions of credit files and conducting "mystery shopping" exercises.
The watchdog Found that customers were not always being given enough information to make informed decisions about buying a car. It was not satisfied that all lenders were complying with the rules on assessing if a customer could afford to buy a car.
(Reporting by Huw Jones; Editing by Toby Chopra/Keith Weir)