The ban on so-called discretionary commission models follows a consultation in October 2019.

Currently, some car retailers and motor finance brokers receive commission which is linked to the interest rate that customers pay.

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 estimates the changes will save customers £165m a year.

Preventing the use of this type of commission would remove the financial incentive for brokers to increase the interest rate that a customer pays and give lenders more control over the prices customers pay for their car finance.

The ban will come into effect on 28 January 2021.

Christopher Woolard, the FCA’s interim chief executive, 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 customers are told about the commission they are paying to ensure 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.

Adrian Dally, head of motor finance at the Finance and Leasing Association, said: “This is a welcome announcement from the FCA as it provides clarity for the industry. We are also pleased that the regulator accepted our point about the need to monitor the consumer hire market as the ban on discretionary commissions does not extend to personal contract hire agreements.”