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Motor Finance mis-selling: What can Finance Providers do now?

Motor finance providers are bracing for a potential storm as the Financial Conduct Authority (FCA) launches a major review into historical commission arrangements and sales practices. Triggered by a surge in consumer complaints, the investigation threatens to expose widespread mis-selling and leave firms facing financial and operational stress.

In this article BeyondFS’s Sophie Rothbarth explains the key issues, going on to examine the implications for the industry, and outlines critical steps that finance providers can take to prepare for an expected wave of new complaints and possible compensation payouts.

Responding to a sharp rise in consumer complaints received by the Financial Ombudsman Service (FOS), the FCA announced on 11th January 2024 a review of historical motor finance commission arrangements and sales across several firms.

The investigation will focus on Discretionary Commission Arrangements (DCAs), which were banned by the FCA in January 2021, and to what extent agreements before this date were unfair to customers. DCAs enabled brokers to adjust the interest rate they offered to customers for car financing. The higher the interest rate, the greater the broker’s commission, leading to a conflict of interest between broker and customer.

Finance companies have been rejecting complaints associated with these agreements, believing that they did not act unfairly and customers were not left worse off. However, in two recent instances, now seen as test cases, FOS took issue with this stance and found in favour of the customers, instructing the firms involved to pay out compensation.

Cars small
Cars small
FCA Announcement
Changes to complaint deadlines

The FCA has now paused the 8-week deadline for motor finance firms to provide a final response to complaints about motor finance agreements where a DCA existed, stating that firms will not have to respond to complaints until after 25 September 2024, at the earliest. They have also extended the time period for consumers to refer their complaint to the Financial Ombudsman from six to fifteen months. There are two reasons for this:

  • The first is to provide the FCA with time to assess if there has been widespread misconduct.
  • Second, the FCA wants to identify how to ensure customers owed compensation receive this in an orderly, consistent and efficient way.
The FCA’s announcement is likely to trigger thousands more complaints as drivers seek compensation, placing significant financial and operational stress on finance providers. Commentators such as Martin Lewis are already suggesting this might be the motor finance equivalent of the PPI scandal. According to RBC, the scope of the FCA review includes around £300bn in lending, and UK banks could be on the hook for up to £13 billion in compensation.
What to do now
Actions that motor finance firms can take

What can motor finance firms do now?

Whilst there are many avenues to explore, including the potential reallocation of capital, the following steps are a good place to start for impacted firms:

  1. Shore up complaints processes and confirm capacity.
    Motor Finance firms can expect more complaints, both DCA and non-DCA focused, over the coming months. They should review whether their complaints handling process is ready to scale dramatically if needed. For DCA cases, they should be ready to inform claimants of the new timeframes and gather associated evidence to support their eventual resolution.

  2. Ensure agreements are linked correctly to customers
    It will be increasingly important to link agreements correctly to customers and ensure easy access for complaints handling teams. Categorising agreements and creating a single source of truth will help prioritise areas of risk and guide resource allocation. This exercise may prove more complex than expected but will likely save time as complaints increase. As part of this work, records held with a lender or intermediaries should be put in a legal hold (regardless of whether the customer has complained or not) and digitised to review and assess them more efficiently.

  3. Review previous motor commission complaints
    Previous complaints should be assessed to understand if (based on the new findings) these were correctly or incorrectly rejected. We recommend proactively addressing these outcomes accordingly following further guidance from the FCA.

  4. Complete a risk and control self-assessment (RCSA) against the sales processes
    The FCA are highlighting concerns around DCA sales processes. When combined with the new Consumer Duty obligations, firms will benefit from assessing the risk and controls framework surrounding these processes to highlight any remedial areas.

  5. Ensure customers are aware of the time limit changes for handling DCA related complaints
    In anticipation of greater press coverage and consumer awareness, it may be prudent to send an outbound customer communication explaining DCA agreements and the complaints process, with links and signposts to FCA support and materials.

  6. Set up a programme to provide control and clarity across all activities
    Motor finance agreements will fall under regulatory scrutiny in the coming months. Setting up a central mechanism to define and document the approach taken, and track related items, will prove invaluable in managing internal and external stakeholders, and being able to respond promptly to regulatory interest.
Next steps
How we can help

BeyondFS have helped many organisations in setting up and managing regulatory-driven programmes of work. We can help you with the end-to-end process of initiating, managing and delivering the required programme to ensure that you are able to manage your customers, the regulator, and internal stakeholders with confidence and clarity.

Please reach out to us if you would like to discuss your challenge further.

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