Commission Disclosure – Consumer Credit

YOUR COMPLIANCE MATTERS:         Commission Disclosure – Consumer Credit

Relevance:                 Any firm offering consumer credit facilities to consumers.

Action required:       Check that relevant disclosure is being made, e.g., Terms of Business.

There are a couple of points to remember here, before going in to detail:

1)    Consumer Credit applies only to consumers, sole traders, and partnerships of 3 or fewer and unincorporated associations; it does not apply to limited companies.

2)    Back in 2018, the IDD (Insurance Distribution Directive) introduced the “customer’s best interest rule”, which requires all regulated firms to “act honestly, fairly and professionally in accordance with the best interests of its customer”.

The FCA published final rules last year in its Policy Statement - Motor finance discretionary commission models and consumer credit commission disclosure.

Whilst this may appear to have been aimed mainly at some of the finance arrangements set up between motor dealers and finance providers, there was also a more general re-emphasis of commission disclosure requirements for all firms offering credit facilities, e.g., premium finance.

Disclosure of the remuneration that a firm receives has been necessary for some time, particularly the “nature” of such remuneration. The FCA defines commission as “any form of commission or remuneration, including a benefit of any kind, offered or given in connection with…..insurance distribution activity in connection with a non-investment insurance contract…”

And if asked for details of its remuneration, firms should have a set procedure, including a formula, which will allow for a satisfactory response. If one is not in place, perhaps now is a good time to introduce one.

So, the firm’s Terms of Business document is likely to contain wording similar to the following:

We are remunerated by commission from insurers and premium finance providers for arranging your insurance and associated finance. Commission will be a percentage of your premium or finance charge paid to us by your provider.

For the vast majority of instances, we believe that this sort of phraseology would suffice and comply with the disclosure requirement. We would also expect that all alternatives for premium finance would have been explored so that the customer will have the benefit of the most reasonable finance arrangement available to them, such as the insurer’s own facility.

This would fulfil the commitment required under the “customer’s best interest rule”.

However, if a firm is determined to pursue a different strategy, it will be essential for them to explain in straightforward terms why a particular premium finance arrangement is most suitable for that customer.

We know that insurance provision under “commercial combined” arrangements will see a number of different covers with different providers and there may be an agreement with the client that premium finance from one lender, with a single monthly payment that assists with cashflow and internal administration, is most suitable. This is more likely to affect businesses that sit outside the provisions of the Consumer Credit Act and therefore, the commission disclosure requirements.

The date of implementation is 28 January 2021; giving time to check your Terms of Business document and if necessary, amend accordingly.

If you need to discuss any aspect of this matter with us, please make contact in the normal way.