In 2021, the Financial Conduct Authority (FCA) ruled to ban discretionary commission arrangements, which removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance. The regulator announced that they are asking firms to review their historic practices and address any harm identified through the use of banned discretionary commission agreements (DCAs).
What does this mean for motor finance firms?
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- The presence of banned discretionary commission arrangements may have affected thousands of consumers, where motor financing firms should expect complaints management issues to increase.
- The FCA will use its powers under s166 of the Financial Services and Markets Act 2000, to review sales of historical motor finance commission arrangements across several firms.
- The Financial Ombudsman Service has reviewed several claims that were rejected by firms and found some in favour of complainants.
The FCA stated “If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way”
FCA updates
Following on from the FCA’s recent updates, there is a proposed extension of the standing pause that firms have been given to respond to consumers on their motor finance complaints. This proposed deadline would be pushed back until the end of 2025.
The FCA has said in their recent release “The extended pause allows us time, if necessary, to introduce an alternative way of dealing with DCA complaints, such as a consumer redress scheme. It is too early to say if we will intervene in this way, but based on our work so far, it is more likely than when we started our review”.
How can firms prepare?
The FCA now intends to set out the next steps to their review in May 2025, expecting firms to have adequately handled all motor finance complaints by Dec 2025. The FCA has stated that the announcement in May could either confirm redress handling schemes or may end the complaints handling pause early. Either way, firms should have started their review, and for those wanting to offset this level of regulatory uncertainty, now is the perfect time to get a head start on the work to be done.
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By GlobalDataThe motor finance sector is experiencing significant scrutiny, with a sharp focus on fair treatment of customers and resolving complaints effectively. The FCA is holding firms to higher standards of accountability, particularly in areas such as affordability assessments, commission structures, and ensuring customers fully understand their agreements.
Effective complaints remediation is not just about addressing issues retroactively; it’s about building trust and ensuring fairness is embedded in every step of the customer journey. Firms must prioritise transparency, clear communication, and proactive identification of potential miss-selling or unfair practices.
Repercussions
In several courts of appeal rulings made in October 2024, it was dictated that motor finance firms were providing unlawful commission agreements, where payments had not been properly disclosed to the consumer.
Off the back of these rulings, some motor finance firms are now experiencing a fall in share prices, some as much as 21%. These effects have shocked many motor finance providers into putting a pause on motor finance lending, at the risk of permitting unlawful commission payments. Emergency measures have also been put in place by firms to ensure commission structures are compliant with the rulings made last month and improve accountability to their consumers.
Other impacts
- Industry & Reputation – Consumers have up to 15 months (either until 29 July 2026 or 15 months from the date of their final response letter from the firm) to refer their complaint to the Financial Ombudsman Service. Firms want to get ahead of the curve in anticipating any complaints. With increased coverage in the industry, any news on outcomes of reviews and customer complaints creates a potential for reputational risks.
- Stretched Complaints Teams – Firms will need to address any motor complaints remediation, whilst also meeting the needs of supporting their customers. This will require capacity past the current firm’s capabilities. Independent review can ensure firms have caught all breaches without significant effect on current teams.
- Regulatory Pressures – The FCA is taking these issues increasingly seriously in carrying out its current investigation of historical arrangements and sales. Regulatory engagement will be needed, where independent review can provide industry expert advice on best practices, and where the regulator may be focusing its efforts.
- Historic Settlements – Any breaches will be investigated, and firms will be required to pay any compensation owed or appropriate settlement. Historic settlements will be reviewed, and extended timelines mean products and queries will be kept open whilst the FCA expects firms to complete a full review.
- Cashflow concerns – Firms are being encouraged to set aside funds due to the uncertainty of redress and remediation impacts of the upcoming FCA investigations. The introduction of a Consumer Redress Scheme could also be announced, potentially increasing the costs of compensating consumers into the tens of billions of pounds across the industry.
Moving forward
For motor finance firms, staying ahead of these regulatory expectations means having robust processes in place, training staff on compliance, and continuously monitoring and improving complaint handling. Firms can leverage advanced technology offerings already in the market to manage and automate their customer outreach workflows through a SaaS solution.
By digitising parts of the outreach, redress, and remediation processes, firms can also create operational efficiencies and accelerate their necessary customer interactions. Through prioritising frictionless customer support team interactions with consumers, e.g. for customer authentication processes, or to collect responses through online customer forms, motor finance firms can keep good customer outcomes at the heart of their work.
Karan Kapoor, Global Head of Regulatory and Risk Consulting at Delta Capita
