The FCA have been closely monitoring the motor finance industry due to a surge in complaints following the ban on Discretionary Commission Arrangements (DCA) in 2021. Therefore, it will come as no surprise that the regulator has been prompted to take action after investigating claims that consumers have been overpaying on car loans sold by brokers and lenders between 2007 and 2021.
Firms have been inundated with complaints and claims and have rejected thousands of these as they believe they have treated customers fairly. However, the Financial Ombudsman Service (FOS) recently published its first two final decisions, which found in favour of the complainants. Perhaps unsurprisingly, both decisions found against the lenders, but the reasoning and approach of FOS defers quite markedly from the judicial approach in court actions.
As part of a series on this topic, we explore the actions taken by the FCA, the reasons behind their interventions, and the impact on both firms and consumers in respect of complaints – taking into account the additional insight provided by the recent webinar, as well as our own experience from supporting the industry in this area over the recent past.
FCA's proactive measures:
Under Section 166, the FCA is employing its powers to conduct a Skilled Person Review of historical motor finance commission arrangements across several firms. Whilst conducting this review, the FCA has implemented the following measures:
- Pause of Response Time: The 8-week time limit for firms to respond to initial complaints has been temporarily paused from 11 January to 25 September 2024.
- Prolonged FOS Claim Period: The window for referring complains to the FOS has been extended from 6 to 15 months. This 9-month extension allows firms more time to respond, enabling the FCA to complete its review and determine if complaints warrant traditional processing or if there is need for a consumer redress scheme.
The Skilled Person reviews are seeking to identify if there are widespread failures within the industry which have led to financial losses for consumers. By adopting this approach, the FCA aims for an orderly and efficient solution across the market, with findings guiding subsequent actions against firms and an encouraged resolution in some instances.
Scope of the pause:
With the FOS having upheld two DCA complaints and the FCA's announcement being widely reported in the press, a rise in consumer complaints is expected. Indeed we have already seen activity from consumer champions encouraging consumers to log complaints now, on top of the already increased activity from Claims Management Companies (CMCs) – indicating a view, at least from a consumer perspective, that this is likely to be the next mass redress event. Against this context, the pause will allow the FCA to take its time to decide its own approach and what guidance the industry needs to ensure good customer outcomes.
The pause applies to complaints related to regulated credit agreements before 28 January 2021, specifically involving the financing of a motor vehicle and a DCA. Relevant complaints are those logged with firms between 17 November 2023 and 25 September 2024. Excluded from the pause are any complaints received prior to these dates, civil claims in courts, complaints unrelated to motor finance, and those already resolved by the FOS.
What we have learned from the FCA's communications - key considerations for firms:
During its recent webinar on 24 January 2024, the FCA emphasised the following considerations for firms:
- Implementing the New Rules: Firms must ensure they implement all new complaint handling rules that are relevant (DISP App 5.1 and 5.2). The FCA's website will also remain updated to show new developments as they progress.
- Record Retention: The FCA will be asking firms to provide documentation relating to credit agreements that involve a DCA (DISP App 5.3). Firms will need to preserve all documents created before 28 January 2021. When a firm has already deleted the records of a customer who is making a complaint, the firm will need to look at the general arrangements with lenders at the time and there is an expectation that there will be ongoing exchanging of information between parties.
- Financial Preparedness: Firms should ensure adequate financial resources are in place to cover operational and complaint resolution costs.
- Communication with Customers: Firms must inform customers of the pause, providing relevant information and provide a link to the FCA's Car Finance Complaints webpage (fca.org.uk/firms/information-firms-motor-finance-complaints).
- Types of Complaints: Firms were reminded that the temporary rules apply narrowly to complaints about DCAs and not to other aspect of motor finance sales, so firms should ensure their processes are able to distinguish these. Importantly, it was also clarified there is no need to pro-actively reconsider complaints at this stage, if customers have received the appropriate Final Response communication.
Firms will need to be prepared for increased complaints being made against the lender and the broker and in some cases the customer may have been compensated by both. The Skilled Person Review exercise will bring further clarity to this issue as it is not reasonable to expect consumers to know who to complain to. The requirement to investigate complaints remains in place, so firms should consider whether another party is wholly or partly liable for the potential loss in the complaint.
So what's next?
As the FCA's Skilled Person review exercise unfolds, firms in the motor finance industry must adapt to the evolving regulatory landscape and handle complaints appropriately during the pause, as well as preparing to respond to whatever comes next.
Many within the industry anticipate that the FCA will look for a change in DISP to provide for redress, as they did with PPI. However, we are doubtful that the CMCs in particular will accept the level of redress that may be settled upon by the FCA. Equally, if the calculation of redress is equivalent to the return of the interest payments, it is unlikely that the motor finance industry is going to accept that calculation either – so the Court actions will continue (and may take on an increased importance).
For what it is worth, during its webinar, the FCA was asked if the next steps were a 'done deal' (effectively that the industry should be preparing for mass redress claims) and the response was that 'no it is not a done deal' and that this is why FCA is undertaking the review i.e. to assess harm and scale and determine next steps.
While some on the cynical side of things may not be comforted, it does suggest the FCA is open to considering all elements and we await any updates from the review or any future consultation, to understand how the industry will be able to present its own views. In particular around the level of any redress – the FOS decisions laid out a redress calculation that gave no room for any commission for the broker and this does not appear to reflect the reality of the commercial arrangements that would have been in place between lenders and brokers, and how the deal for the customer may have differed in other aspects if no, or very limited commissions had been allowed.
If the outcome is a consumer redress scheme, the motor finance industry could be looking at a cost of £13 billion according to some estimates. A consumer redress scheme would also likely bind the FOS, which will result in the FOS having to assess complaints under the rules of the redress scheme. Navigating the complaint handling rules, implementing necessary changes, and proactively engaging with customers will be crucial for maintaining compliance and fostering trust within the industry. The outcome of the review will undoubtedly shape the future of motor finance and consumer protection.
As a result, we anticipate a strong response from the industry to the outcome from the review to at least ensure it has been given fair consideration, and balanced against the need to protect consumers – to this end, FCA acknowledged that it is possible the September deadline will simply be the next milestone on the road to a conclusion, rather than the final destination.
For now, the immediate aftermath looks likely to see an escalation in complaints and CMC activity. We also anticipate a perhaps unwanted effect of the Policy Statement will be a spike in the number of legal claims issued (mainly by the CMCs) against motor finance providers (and we are already seeing this uptake for our clients), as they realise that their window of opportunity begins to close.
If you have any concerns with regard to how this impacts your firm now, or potentially in the future, the please feel free to get in touch. We are very active in respect of all strands of vehicle finance and at DWF, we have a unique blend of legal and regulatory consulting services, which can support with all aspects of this topic and help you consider your next steps.
