FCA intervention in the motor finance market

Jan 11th '24

The Financial Conduct Authority (FCA) has today released PS24/1, which modifies the process for handling complaints about discretionary commission motor finance temporarily. This is a unique move by the regulator, and it might have a significant effect on people who work in the auto finance sector.


What is the FCA up to?

The FCA is amending the complaints handling guidelines for automotive loan arrangements that have a discretionary commission agreement between the lender and broker as of January 11, 2024. Currently, businesses have eight weeks from the date of receipt to issue a final answer to customers. There will be a halt in this timeline starting now and lasting until September 25, 2024. This implies that businesses won’t be required to finish resolving complaints in the customary eight weeks. Customers now have 15 months instead of just 6 months from the date of the final response to file complaints with Financial Ombudsman Service (FOS), according to the regulator.


What justifies the regulator’s actions?

Discretionary commission arrangements (DCA) were outlawed by the FCA in January 2021. This came about as a consequence of an inquiry that found broad worries about the harm that discretionary commission agreements were doing to customers. With a DCA, a broker’s compensation is correlated with the interest rate the consumer pays as per the credit agreement, giving the broker some leeway in setting the interest rate. Brokers with higher commissions were shown to have clear motivations to raise the interest rate.


A significant number of consumer complaints have been made since the discretionary commission restriction. According to data gathered by the FCA, companies are dismissing nearly all of these complaints on the grounds that they don’t think they violated any laws or were unfair to their clients. In the meanwhile, FOS has been reviewing some of these complaints and has recently ruled twice in the complainant’s favor. The FCA anticipates that a large number of complaints to FOS will result from this. They have also witnessed several County Court claims upheld.


There is obviously a difference in perception between the company and the client, and the FCA anticipates a deluge of complaints. They worry that a rise in complaints might result in chaotic, uneven, and inefficient consequences for consumers, businesses, and the market.


During the pause period, what will the regulator be doing?

The FCA will examine past motor finance commission programs and sales across many businesses, utilizing their authority under the FSMA. PS 24/1 refers to their diagnostic work in which they examine the behavior and procedures within specific firms to ascertain, among other things, whether there is a widespread noncompliance, the possible number of customers who may be entitled to redress, and the possible amount of redress. They will enlist the assistance of Skilled Persons for this activity, which entails reviewing a sizable sample of client files.
The FCA’s decision about whether companies owe recompense to numerous customers will be aided by this diagnostic work. In such event, they could determine that offering that redress through the standard complaints procedure does not result in the best outcomes for clients and, in order to assist settle any disputed legal problems, they might instead establish an industry-wide consumer redress program or apply to the Financial Markets Test Case Scheme. By no later than September 24, 2024, they will make their decision and subsequent actions public.


What this means for businesses is:

  • It is advisable for any firm handling discretionary commission complaints to hold off on providing definitive answers until the subject has been brought before the board for consideration and possible resolution.
  • Companies must examine their present procedures for managing complaints and make any necessary changes to systems and correspondence very away.
  • There will be s166 reviews because to the glaring discrepancy between FCA and Firm results. All of this should be done in light of the Policy Statement and Consumer Duty responsibilities. A company should make every effort to ensure that internal policies and procedures are well-prepared and followed. The FCA shouldn’t be your reason to put off reviewing your complaints management system.
  • Consumer Duty is mentioned in every s166 that we have seen issued in the previous six months; the FCA is unlikely to stop short of restricting the scope of s166 requests to DCA activities. In particular, when it comes to Price and Value, firms must make sure that they have effective complaint root cause analysis complaint data and make sure that this is shared with key stakeholders.
  • Firms must make sure that they have assurance that the Duty has been delivered and that they can evidence change. It won’t be sufficient to just state that discretionary commission models are no longer used; many of these complaints raise concerns about commission disclosure, and firms will need to provide proof of the procedures they have modified to address these concerns.
  • Examine operational bandwidth and resource models; the announcement made today will only serve to ratchet up activity for claims management companies. The chance of regulatory action increases with the number of complaints a firm receives.


Firms are released from the immediate obligation to respond to DCA complaints in full within eight weeks, until September 25, 2024. This does not imply that businesses should disregard these grievances. Firms are required by the FCA to swiftly and diligently assess and investigate complaints. This implies that they must carry out their investigations and gather all relevant information in order to support their ultimate determination. This is an example of the kind of steps that would be required should the FCA choose to move forward with an industry redress plan.


The wait does not prevent the sending of the final response. This would enable a client to make use of FOS. The inference is clear: since it is likely that redress would eventually need to be paid, corporations are not making the proper option today in not upholding these types of consumer complaints. As a result, there is no purpose in closing a complaint and enabling the customer to refer to FOS.


It’s clear that the devil is in the details in this case, therefore businesses must study PS24/1 and comprehend their obligations.


Our opinion

There will be a lot of regulatory attention on the car finance industry, so it’s best to be aware of your dangers before the FCA calls. This paper addresses the core of the consumer duty and goes beyond commission models. Businesses must be ready on all fronts. We understand that businesses are already under pressure to accomplish more with less, and we are delighted to talk with you about your goals and course of action.


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