In January 2024, the Financial Conduct Authority (FCA) commenced a review into historical motor finance discretionary commission arrangements (DCAs), which was triggered by a wave of customer complaints the Financial Ombudsman Service (FOS) issuing two decisions in favour of complainants.
DCAs, which were banned by the FCA in January 2021, allowed brokers to adjust interest rates offered to consumers, which also resulted in adjustments to the levels of commission they received from the motor finance providers. This may have caused detriment to consumers in some instances. It's been estimated by the FCA that loans sold with DCAs constituted three-quarters of motor finance lending between 2007 and 2020.
As a result of the FOS’s two decisions and the FCA’s expectation of a resulting increase in the volume of consumer complaints relating to DCAs prior to the ban, the FCA stepped in and is investigating whether consumers may have a valid claim for compensation relating to loans made before the ban was in place. It has also introduced a pause on the statutory response timeline, which has subsequently been extended until December 2025.
Should ‘widespread misconduct’ be established, the regulator could instigate an industrywide consumer redress scheme under section 404 of the Financial Services and Markets Act. The FCA has stated that it intends to set out the next steps in its DCA investigation in May 2025.
To add to the complexity of the of the situation, the Court of Appeal (CoA) handed down a judgment on three cases in October 2024, in which it ruled that it was against the law for brokers to receive a commission of any kind from lenders providing motor finance, without the customer’s informed consent. This was a significant development in case law on motor finance commissions and the appeal on that judgment is set to be heard by the Supreme Court (SC) in early April 2025.
In response to the CoA’s judgment, the FCA expanded the current pause on DCA related complaints to include all non-DCA complaints as well.
The ability of the FCA to provide clarity and detail on next steps in May is clearly subject to the nature and timing of the SC’s judgment.
While the review is ongoing, with associated media coverage, motor finance firms will continue to receive increased complaints. Firms need to consider and prepare for the likely impact of the review on their business now.
We discuss the recent Court of Appeal decision regarding motor finance complaints, which requires greater disclosure of commissions paid to brokers and explicit consent from borrowers.
In a Court of Appeal decision considering motor finance commission, senior judges ruled in favour of consumers who had complained about unexpected commission on car loans. We explain the potential impacts on the industry and wider economy.
