A review into historical motor finance discretionary commission arrangements has triggered a wave of customer complaints, with the potential for an industrywide consumer redress scheme.
Complaints relate to discretionary commission arrangements (DCAs), which were banned by the Financial Conduct Authority (FCA) in January 2021. These 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 well as the FCA’s expectation of an increasing volume of consumer complaints relating to DCAs prior to the ban, the Financial Ombudsman Service (FOS) issued two decisions in favour of complainants in January 2024.
The FCA has therefore 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 – until 25 September 2024 – and aims to communicate a decision on next steps in the third quarter of 2024.
Should ‘widespread misconduct’ be established, the regulator could instigate an industrywide consumer redress scheme under section 404 of the Financial Services and Markets Act.
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.
In advance of the FCA setting out its next steps, we advise the following actions:
Our experts, along with Adrian Dally of the Finance and Leasing Association, discuss the FCA’s investigation and what it might mean for consumers, lenders, dealers and brokers.
The FCA’s review of discretionary commission arrangements (DCAs) has highlighted motor finance firms’ challenges in collecting and providing accurate data. Justin Cooper discusses recent comments from the regulator and ombudsman – and what firms need to consider now.
How should motor finance firms respond to the regulator's appointment of a skilled person to review historical DCAs?
Lessons for motor finance firms from the high-cost short term credit sector.
