The FCA announced on 11 January 2024 a review of historic commission arrangements in the motor finance sector, which could result in an industry-wide consumer redress scheme under section 404 of the Financial Services and Markets Act 2000 (FSMA).
Firms have received high volumes of complaints relating to discretionary commission arrangements (DCAs), whereby brokers were incentivised to charge customers a higher interest rate. The FCA banned these agreements in 2021.
The Financial Ombudsman Service (FOS) has issued its first rulings on complaints relating to DCAs, finding in favour of the complainants (the decisions are available here and here).
The FCA believes that these rulings would have prompted a significant increase in complaints, if it did not take steps to address the issue. It has therefore issued PS24/1, introducing rules which pause the deadline for motor finance firms to respond to relevant complaints.
The regulator will now conduct a skilled person review to assess whether the historical use of DCAs means a significant number of consumers are owed redress, and will announce next steps by September 2024.
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What does this mean?
The FCA will carry out diagnostic work, including appointing a skilled person(s) to report on how a sample of firms carried out motor finance sales before the 2021 ban. While the FCA has not specified how far back the review will extend, it says it will include sales before the FCA took on the regulation of motor finance firms in April 2014. The review will look at the arrangements between lenders and brokers, and the information provided to consumers at the point of sale, including how commission was disclosed.
The FCA will use the findings to decide whether an industry-wide consumer redress scheme is needed, based on whether there was widespread misconduct, the number of impacted customers, and the amount of redress owed.
It will announce next steps by 24 September 2024, which may include an industry-wide redress scheme, and applying to the Financial Markets Test Case Scheme to help resolve any contested legal issues.
The published FOS decisions provide an indication of the calculation basis for any redress scheme. In both cases, the FOS determined that the discretionary commission model created an inherent conflict between the interests of the broker and the interests of the customer, and that the lender acted contrary to the guidance at CONC 4.5.2G, and failed to have due regard to the customer’s interests and treat them fairly as required by Principle 6. The FOS required the lender to compensate the customer by: paying the difference between the payments the customer made, and the payments they would have made had the agreement been set at the lowest (zero discretionary commission paying) flat interest rate permitted, plus 8% simple interest per year.
Given the FCA expects DCA complaints to increase significantly while it carries out its diagnostic work, it has paused the eight-week deadline for firms to provide a final response to relevant customer complaints, with immediate effect. The pause will last for 37 weeks, and apply to complaints received between 17 November 2023 and 25 September 2024. The regulator says it may need to consult on further extending the pause.
Consumers will also have 15 months to refer their complaint to the FOS, rather than the usual six months. This extension applies to complaints where the firm sends a final response between 12 July 2023 and 20 November 2024.
What do firms need to do?
Firms should assess the extent to which they are impacted by the FCA and FOS announcements. |
Firms should prepare for an increase in customer contacts, and for potential involvement in the FCA’s review. |
The FCA encourages firms to continue to progress complaints. |
Firms should assess the extent to which they are impacted by the FCA and FOS announcements. Those directly impacted should prepare for involvement in the FCA’s skilled person review, and prepare to be required to establish a remediation programme, paying due regard to the published FOS decisions.
All firms active in this market, including those not directly impacted by the review, should prepare for an increase in customer contacts, complaints and data subject access requests prompted by these announcements. Firms should ensure they have sufficient operational capacity to deal with such an increase.
Despite the pause to the complaints time limit, the FCA encourages firms to continue to progress DCA complaints where possible, by continuing to investigate and collect evidence to help with their eventual resolution.
“This initiative will have a broad impact - even those lenders, and potentially other market participants, not directly impacted by the FCA’s work must prepare for the inevitable increase in customer complaints and data subject access requests which will be prompted by the publicity around these announcements. While the FCA has not yet confirmed the next steps to follow the skilled person review(s), given public and political sentiment, I suspect it is likely to initiate some form of sector-wide redress scheme specific to DCAs in due course.”
David Kenmir
Partner, PwC
Next steps
The FCA will announce next steps by 24 September 2024. The regulator welcomes feedback on the impact of the rules in PS24/1, and its approach to the provision of redress for harm caused by DCAs, by 11 March 2024.
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