The Financial Conduct Authority (“FCA”) have sent their latest ‘Dear CEO’ portfolio letter to the motor finance sector this month. The letter outlines the FCA’s urgency for motor finance firms to ensure that they are maintaining adequate financial resources.
In January, the FCA announced a review of historic motor finance commission arrangements and sales involving several firms. The FCA have emphasised the importance of firms promptly providing comprehensive data to expedite the clarification process and understands the uncertainty which the review has caused the sector. The FCA aims to outline next steps by the 24th of September.
As part of their review, the regulator noted variations in how firms account for potential financial impacts stemming from past breaches of laws and regulations related to discretionary commission arrangements (DCA). The FCA reminded firms of the necessity to maintain adequate financial resources, considering potential operational costs from increased complaints.
The FCA also stressed that firms must assess the adequacy of their financial resources, analyse the impact of any capital reductions, ensure accuracy of financial statements, and make adequate disclosures to the FCA and relevant stakeholders. Firms must handle DCA complaints and subject access requests appropriately.
The FCA outlined their actions, including ongoing supervision, in monitoring the financial resources and DCA-related complaints, and additional data collection as necessary.
What does this mean for motor finance firms?
Firms authorised under the Financial Services and Markets Act 2000 must meet the FCA’s Threshold Conditions and Principles for Businesses, which sets out that firms must have appropriate resources. The FCA also set out their expectations for regulated firms’ framework for assessing adequate financial resources in more detail in FG 20/1 Our framework: assessing adequate financial resources, including the need to cover potential redress liabilities.
Firms must assess the adequacy of their financial resources and undertake an assessment of whether their financial resources are adequate. This assessment should be proportionate to the scale and complexity of the firm’s regulated activities. Assessments must include horizon scanning and consider risks and potential redress liabilities.
Firms must deal with DCA complaints and subject access requests appropriately and should continue to investigate the complaints they receive involving DCA structures. Moreover, in alignment with the Information Commissioner’s Office guidance, firms must appropriately respond to data subject access requests, including confirming whether DCAs were involved in consumer agreements.
The FCA have said that they will monitor financial resources held by individual firms through existing regulatory reporting and ongoing supervisory engagement. In addition to monitoring financial resources, the regulator will also monitor the volume of DCA related complaints firms are receiving.
The FCA also emphasises the importance of communication, urging firms to notify the regulator of any litigation concerning motor finance commissions subject to, or likely to be subject to appeal.
This latest communication from the FCA underscores the necessity for firms to anticipate additional operational costs stemming from escalated complaints relating to DCA practices.
