The Financial Conduct Authority (“FCA”) has put into place a ‘pause’ on the 8-week deadline for motor finance firms to provide a final response to relevant customer complaints whilst it examines the issue of discretionary commission arrangements (“DCA”).
What are discretionary commission arrangements?
DCAs are specific commission structure which was often seen in the motor finance industry where car dealers or brokers had the ability to determine the interest rate on a customer’s finance agreement. This meant that dealers/brokers could decide how much interest a customer is charged when paying off the loan on a new vehicle often keeping the difference between the lender base rate and the interest set by the dealer/broker as commission.
These schemes were banned by the FCA in 2021.
What is happening now?
Motor finance firms have seen a high number of complaints from customers claiming compensation for DCAs prior to the ban. However, many firms are rejecting these complaints because they do not believe that they have acted unfairly nor caused customer loss sighting the applicable legal and regulatory requirements at the time. If customers do not agree with a firms response they can escalate this to the Financial Ombudsman Service (“FOS”).
The FOS has considered some of the complaints which have been escalated to it and has found in favour of complainants in two recent decisions. Similarly, claims have also been brought in the County Courts system which have also been upheld. This shows a significant dispute as to whether firms have breached legal and regulatory requirements.
As a result of this, the FCA will begin to use their powers under s166 of the Financial Services and Markets Act 2000, to review historic motor finance commission arrangements and sales across several firms to ascertain whether there has been widespread misconduct resulting in consumer loses.
During this time, the FCA has introduced a pause on the 8-week deadline for final complaint responses which will last for 37 weeks. The pause will apply to complaints about motor finance agreements where there was a discretionary commission arrangement between the lender and the broker. Consumers will have up to 15 months to refer their complaint to the Financial Ombudsman, rather than the usual 6 months.
Next steps
The FCA will begin their investigation and will request information from some firms to assist in their analysis to identify whether the practises of some firms have resulted in consumer harms.
Firms should ensure that they have reviewed their practises prior to the ban and address any consumer harms they find.
