Major FCA intervention in the motor finance market
Today (11 January 2024) the FCA has published PS24/1 which brings in temporary changes to the way discretionary commission motor finance complaints should be handled. This is an unusual step for the regulator and will have potentially a big impact on those in the motor finance industry.
What is the FCA doing?
As of 11 January 2024 the FCA is changing the complaints handling rules in relation to motor finance agreements where there was a discretionary commission agreement between the lender and broker. Currently firms must provide a final response to customers within 8 weeks of receipt. This timeline is being paused with effect from today until 25 September 2024. This means that firms will not have to continue closing complaints within the usual 8 week period. The regulator is also extending the time limit for customers to refer their complaints to FOS from 6 months to 15 months from the date of the final response.
Why is the regulator doing this?
The FCA instigated a ban on discretionary commission arrangements (DCA) in January 2021. This resulted from an investigation which identified widespread concerns that discretionary commission arrangements were causing customer harm. A DCA is an arrangement where the commission received by a broker is linked to the rate of interest the customer is charged under the credit agreement and allows brokers wide discretion in determining the interest rate charged. Clear incentives were identified for brokers to earn more commission by increasing the interest rate.
Following the discretionary commission ban there have been a large volume of complaints from customers. The FCA has found that firms are rejecting almost all of these complaints because they believe they have not acted in an unfair or non-compliant way and their actions have not caused loss to customers. FOS meanwhile have been considering some of these complaints and have found in favour of the complainant in two recent decisions. The FCA expects this to prompt a significant increase in complaints to FOS. They have also seen a number of upheld claims in the County Courts.
There is clearly a disconnect here between the view of the firm and the customer and the FCA is expecting an avalanche of complaints to be submitted. They are concerned that the risk of increased complaints could lead to disorderly, inconsistent and ineffective outcomes for customer, firms and the market.
What will the regulator be doing in the pause period?
The FCA will be using their powers under FSMA to review historical motor finance commission schemes and sales across several different firms. PS 24/1 refers to their diagnostic work where they will look at the conduct and practices within individual firms to determine, amongst other things, whether there is a widespread failure to comply, the potential numbers of customers who could be owed redress and the amount of redress that might be owed. They will use Skilled Persons to help them with this work which will involve large sample size customer file reviews.
This diagnostic work will help the FCA decide whether firms owe redress to large numbers of customers. If so, they may decide that providing that redress through the normal complaints process does not lead to the best outcomes for customers and instead might set up an industry wide consumer redress scheme or apply to the Financial Markets Test Case Scheme to help resolve any contested legal issues. They will publish their decision and next steps by 24 September 2024 at the very latest.
What does this mean for firms:
Any Firm processing discretionary commission complaints would be wise to pause final responses from today until the matter has been taken to Board for review and action.
Firms will need to review current complaints handling processes and modify systems and letters with immediate effect. All of this should be done in light of the requirements of the Policy Statement and Consumer Duty.
The obvious disconnect between FCA and Firm outcomes will trigger s166 reviews. The more a Firm can do to prepare and seek assurance of internal policy and procedure the better. You don’t want to wait to review your complaints management framework until the FCA comes calling.
Every s166 we have seen issued in the last six months makes reference to Consumer Duty – the FCA are unlikely to stop short at limiting the scope of s166 requests to DCA activity. Firms need to ensure and seek assurance that the Duty has been delivered and they can evidence change – particularly when it comes to Price and Value.
Firms need to ensure that they have effective complaint root cause analysis complaint data and check that this is being shared with key stakeholders. It will not be enough to say discretionary commissions models are no longer in place – a number of these complaints raise issue with commission disclosure, and Firms will need to evidence how and what processes they have changed in response.
Review resource models and operational bandwidth - today’s announcement will only serve to increase claims management company activity. The more complaints a Firms receive the higher the likelihood of regulatory intervention.
With immediate effect firms do not need to provide a final response to DCA complaints within 8 weeks up until 25 September 2024. This does not mean that firms should ignore these complaints. The FCA is clear that firms should continue to assess and investigate complaints promptly and diligently which means they should continue their investigations and collecting evidence which could help with their final resolution. This is typical of the sort of actions which would need to be taken if the FCA decides to proceed with an industry redress scheme.
The pause doesn’t mean that final response cannot be sent. This would allow a customer to refer to FOS. The clear implication is though that firms are not making the right decision currently in not upholding these types of customer complaint therefore there is no point in closing a complaint and allowing the customer to refer to FOS because ultimately it is likely that redress will need to be paid.
Obviously, the devil is in the detail here and firms will need to read PS24/1 and understand what is required of them.
Our view
The motor finance sector needs to get ready for significant regulatory scrutiny and it is always better to know where your risks lie before FCA comes calling. This work is broader than commission models it goes to the heart of the consumer duty. Firms need to be prepared on all fronts; we know Firms are already under pressure to do with more with less, we have the expertise to help and are happy to discuss your needs and plans of actions.
