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By Huw Jones
LONDON, Oct 14 (Reuters) - Britain's markets watchdog has proposed banning auto dealers and brokers from receiving commission linked to interest rates on loans used to finance car purchases, a step it said would save consumers 165 million pounds ($208.4 million) annually.
The Financial Conduct Authority (FCA) said some motor finance brokers receive commission linked to the interest rate that customers pay.
"The broker can set that 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 said in a statement on Tuesday.
The Finance & Leasing Association (FLA) said the FCA's proposals would deliver clear rules and a consistent approach to commissions.
"Many lenders have already moved to the commission models that the FCA is proposing," said Adrian Dally, the FLA's head of motor finance.
The National Franchised Dealers Association said rules should be proportionate so there is a satisfactory outcome for both consumers and retailers, while consultants PwC cautioned that the crackdown could lead to higher flat fee commission payments.
Using models to compare discretionary commission and flat fee models of financing, the FCA estimated that 924,000 customers were paying in total around 500 million pounds in additional interest costs.
Banning this type of commission would remove an incentive for brokers to bump up the interest rate that customers pay and give lenders more control over the prices customers pay for their motor finance, the watchdog said.
"By banning this type of commission, we believe we will see increased competition in the market which will ultimately save customers money," said Christopher Woolard, the FCA's executive director of strategy and competition.
Shares of motor retailer Pendragon, which jumped 10% on Monday, were up 1.3% in early trading. Auto Trader gained 1%.
"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," said Sarah Nield, financial services risk and regulation director at PwC.
The FCA is also proposing changes to commission disclosure rules and guidance to give consumers more relevant information in all consumer credit markets.
The watchdog will consult on the rules until January 2020 and publish final rules later next year.
It estimates it would cost the industry 35 million pounds to implement the ban in the first year, and 5 million pounds annually thereafter.
($1 = 0.7920 pounds) (Reporting by Huw Jones, editing by Sinead Cruise and Kirsten Donovan)