The Financial Conduct Authority will ban discretionary commission models from 28 January 2021. The FCA has also issued revised commission disclosure rules.
The ruling follows a consultation by the FCA in October last year.
Some car retailers currently receive commission which is linked to the interest rate that customers pay. This creates an incentive to sell more expensive credit to some customers, the FCA claims.
An FCA spokesman said: “The broker can effectively set the interest rate and the FCA found that the widespread use of this type of commission creates an incentive for brokers to act against customers’ interests.”
The FCA’s interim chief executive,Christopher Wooard, said: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.
“We estimate that consumers could save £165 million because of today’s action.”
The FCA will also make changes to the way in which customers are told about the commission they are paying to ensure that they receive more relevant information.
These disclosure changes apply to many types of credit brokers and not just those selling motor finance. These changes will also come into force on 28 January 2021.
Full details are available on the FCA website.