Motor finance under scrutiny: getting your data ready

On 11 January, the FCA announced that it will exercise its powers under s166 of the Financial Services and Markets Act to launch a skilled person review into historical motor finance discretionary commission arrangements (DCAs) and sales involving DCAs across several firms. It stated: “If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure that people who are owed compensation receive an appropriate settlement.”

The FCA is now carrying out diagnostic work to report how a selection of firms have carried out their motor finance sales. The review will look at the arrangement between lenders and brokers, and the information that was provided to consumers at the point of sale.

The next steps will be announced by 24 September, so firms need to fully prepare for a potential redress scheme to come into effect. Firms will need to assess the extent that they are personally impacted by this news and prepare for an increase in customer contacts as a result. With this rise, lenders and dealers must review their data from 2007 onwards and ensure they are ready.  

What led to the FCA’s announcement?

In 2021, the FCA banned incentives for brokers to increase the interest rate that a customer pays for their motor finance. However, many customers have logged complaints claiming compensation was owed for finance taken out prior to the ban. This increase has sparked the FCA to appoint a skilled person to report on how firms carried out their motor finance sales prior to this 2021 ban and to assess how customers have been impacted.

With an estimated 75% of all agreements from 2007 to 2020 including some form of DCA, the number of customers affected will be significant. Extensive payouts will likely be necessary, demanding that firms have substantial resources in place as a result. Firms will need to assess their capabilities to be ready for any redress scheme to come into effect.

Taking a data-driven approach

In light of the anticipated redress scheme, firms must ensure their data is up to standard and ready for an increase in customer activity. In the coming months, there's likely to be a further increase in customer contact, complaints and data subject access requests. Therefore, firms will need to ensure they have strong operational capacity to handle this increase in customer demand and can respond to customers quickly.

It's likely that both structured data (that which fits neatly into data tables, eg, transactions in a database) and unstructured data (PDFs, large text documents, etc) need to be considered.

Firms must conduct a fair and thorough investigation into their complaints, and actively engage with customers to gather key information and ensure their reporting is accurate. Strong data tools are crucial to ensure that data is consistent and accurate. This may require assessing the capacity of legacy systems and how data is currently stored internally. Firms will also need to consider unstructured data, and ensure they can extract insights effectively, for example extracting information from customer contracts. Frameworks must be up to date to manage, organise and report accurate data, and meet the increase in customer demand.

Building a data cube of relevant data will be key. Companies can collect data from a variety of disparate sources – APR, commission, whether there was a trade-on, whether the trade-in value was inflated, whether there was a settlement for a previous finance agreement, and so on – to ensure a robust clean fact base is in place to help address this issue.

Reviewing what data you collect and analyse now could save a lot of time and expense later. Especially so if the process is done in a repeatable manner with consideration given as to how the data can be used for a variety of future scenarios, and allowing for automation in any remediation and redress process.

Staying compliant in the face of regulatory action

With the impending consumer redress scheme, commentators have speculated that the motor finance industry could be looking at billions in compensation. Proactively engaging with customers will be crucial to maintain customer trust.

Firms should look to plan for a remediation programme, to process complaints and identify evidence that can help them resolve claims. A reliable team should be installed, who can ensure that these complaints are processed correctly and stored safely. Data also needs to be futureproof, in case there are further requirements, and kept up to date with ongoing changes.

Compliance will require protecting sensitive customer information and minimising legal or reputational risks. It will be important to assess current operations and ensure that they're up to standard as any redress scheme comes into effect.

Essentially, collecting the right data will help firms make informed decisions and mitigate risk as the FCA takes action. By leveraging this data and having strong tools in place to handle customer enquiries, firms can ensure they are prepared for regulatory action while remaining competitive in the long term.

For more insight and guidance, contact Justin Cooper.