Motorists are set to save around £165 million a year under plans to ban salesmen and brokers from charging some types of commission on car financing deals.

Britain’s financial watchdog is proposing a crackdown to stop car retailers and brokers from charging commission linked to the interest rate that customers pay on loans to buy motors.

The Financial Conduct Authority (FCA) said they can increase the interest rate charged to boost their commission, which “creates an incentive for brokers to act against customers’ interests”.

The FCA said it believes scrapping this type of commission would remove this potential conflict of interest and give lenders more control over the prices customers pay for their motor finance.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “We have seen evidence that customers are losing out due to the way in which some lenders are rewarding those who sell motor finance.

“By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money.”

The FCA is also looking to overhaul the way customers are told about the commission they pay to make information clearer and more relevant, which would apply to many types of credit brokers as well as those selling car finance.

It will consult on the plans until January 15, with final rules set to be published later in 2020.

The FCA warned the sector in March to clean up its act amid concerns over the commission charged on car finance plans for new cars.

It launched its review of the motor finance market in 2017 amid concerns over some practices in the booming sector, which followed a surge in car financing agreements in the UK – from 1.2 million in 2008 to 2.3 million in 2017.

These types of plans accounted for around 66% of the value of all new and used car finance lending in 2017, up from 34% in 2008.

The Bank of England has also raised the alarm over the rise in popularity of personal contract purchase (PCP) plans, cautioning that it could leave consumers vulnerable.

But Sarah Nield, financial services risk and regulation director at PwC, said the move to ban commission linked to interest rates on loans could push up costs elsewhere for buyers.

She said: “Given the largest commissions received by brokers tend to come via the models set to be banned, it will be interesting to see how lenders, brokers and dealerships react.

“Although we expect firms to comply with the spirit of the changes, it could result in unintended consequences including increased flat fee commission payments, car prices and bundled product costs.”