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A senior Bank of England official has branded the use of discretionary commissions “a bad structure and a bad incentive” and cautioned that the FCA’s investigation into the motor finance market could have “significant financial ramifications” for lenders.

Sam Woods (pictured), CEO of the Prudential Regulation Authority (PRA), said the Bank was “very closely engaged” with the FCA and with the firms involved, not from concerns about financial stability issues, but because “the range of outcomes seems quite wide”.

Woods was responding to Dame Angela Eagle, Labour MP for Wallasey at a recent Treasury select committee session, when she raised the question of the impact of any potential fines “for mis-selling because of discretionary commission which was being applied by various brokers to those financing their purchases of cars over the period 2007-2021”.

Eagle characterised the FCA as having “a big mess to clear up because of this misbehaviour since 2007 which has been going on for rather a long time in a very large market”.

‘Devil is in the detail’

The PRA head did not deny that lenders are likely to face substantial payouts for claims, although he also said that the amount of any compensation due was hard to determine at this stage as “the devil is in the detail – there were so many different commission structures and quite where any type of conduct fine or redress bill might land will probably be quite specific from one to another.”

“I’m not concerned at this point that this is a financial stability issue, but it clearly does have the potential to become a quite significant conduct issue with potentially quite significant financial ramifications,” Woods said.

Woods was highly critical of discretionary commission strategies, which he pointed out had been banned since 2021.

“The commission structure which delivers a higher commission if a car salesman or saleswoman manages to sell a higher interest rate to a consumer regardless of their creditworthiness, that is just a bad structure and a bad incentive and I would hope the Consumer Duty would preclude such things emerging in the future. But the Consumer Duty has only been with us for a short time – we’ve only just dropped the ‘new’ in front of it,” he said.

Woods confirmed to Eagle that Consumer Duty is intended to “stop this kind of thing, rather than having lots of detailed rules which firms find their way around in various ways”.

Who decides?

Woods stated that while the PRA has been closely involved throughout the motor finance investigation, it will be up to the FCA to decide “whether and how” to pursue any sanctions.

“I think the FCA has taken a very sensible approach to this so far, and in particular it has decided to step into a very complicated situation with the aim of bringing a bit more order to it and I think that is very helpful,” he claimed.

MPs also quizzed PRA officials about tighter regulation of the shadow banking sector, and the current consultation around ‘step in’ risks, relating to circumstances where banks are forced to take action to support an entity associated with them which could be in trouble. Rules in this area are expected to be released later this year for implementation from January 1, 2026.

You can watch the Treasury selection committee session here.

Read AFC CEO Edward Peck’s warning on regulation creep.

If you have any comments on this developing story, please email them to: lisalaverick@assetfinanceconnect.com