In 2021, a significant ruling by the Financial Conduct Authority (FCA) led to the ban on discretionary commission arrangements. This move removed the incentive for brokers to increase the interest rates paid by customers for their motor finance. The regulator has asked firms to review their historic practices and address any harm caused by the use of banned discretionary commission agreements (DCAs). What does this mean for motor finance firms?

Unraveling the Aftermath of FCA's Motor Finance Decision

Impact on Motor Finance Firms

The presence of banned discretionary commission arrangements may have had a far-reaching impact on thousands of consumers. Motor financing firms should expect an increase in complaints management issues. The FCA will use its powers under s166 of the Financial Services and Markets Act 2000 to review sales of historical motor finance commission arrangements across several firms. The Financial Ombudsman Service has already reviewed several claims rejected by firms and found some in favor of complainants.The FCA stated, "If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way."

FCA Updates and Proposed Deadline

Following the FCA's recent updates, there is a proposed extension of the standing pause given to firms to respond to consumers on their motor finance complaints. This proposed deadline is pushed back until the end of 2025. The FCA has said in their recent release that the extended pause allows them time, if necessary, to introduce an alternative way of dealing with DCA complaints, such as a consumer redress scheme. It is too early to say if they will intervene in this way, but based on their work so far, it is more likely than when they started their review.

How Firms Can Prepare

The FCA now intends to set out the next steps to their review in May 2025, expecting firms to have adequately handled all motor finance complaints by December 2025. The announcement in May could either confirm redress handling schemes or may end the complaints handling pause early. Either way, firms should have started their review. For those looking to offset regulatory uncertainty, now is the perfect time to get a head start on the work.Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research and gain a competitive edge.

Repercussions in the Motor Finance Sector

In several courts of appeal rulings made in October 2024, it was determined that motor finance firms were providing unlawful commission agreements where payments were not properly disclosed to the consumer. As a result, some motor finance firms have seen a fall in share prices, with some drops as much as 21%. These effects have led many firms to pause motor finance lending to avoid permitting unlawful commission payments. Emergency measures have been put in place to ensure commission structures are compliant with the rulings and to improve accountability to consumers.

Other Impacts on the Industry

Industry & Reputation: Consumers have up to 15 months (either until 29 July 2026 or 15 months from the date of their final response letter from the firm) to refer their complaint to the Financial Ombudsman Service. Firms need to anticipate complaints and address them proactively. Increased coverage in the industry means any news on review outcomes and customer complaints can create reputational risks.Stretched Complaints Teams: Firms will need to address motor complaints remediation while also meeting the needs of their customers. This may require additional capacity beyond their current capabilities. Independent review can help firms catch all breaches without significantly affecting their current teams.Regulatory Pressures: The FCA is taking these issues seriously and is conducting an investigation of historical arrangements and sales. Regulatory engagement is needed, and independent review can provide industry expert advice on best practices and help the regulator focus its efforts.Historic Settlements: Any breaches will be investigated, and firms will be required to pay compensation owed or provide appropriate settlements. Historic settlements will be reviewed, and extended timelines mean products and queries will remain open while the FCA expects firms to complete a full review.Cashflow Concerns: Firms are encouraged to set aside funds due to the uncertainty of redress and remediation impacts of the upcoming FCA investigations. The introduction of a Consumer Redress Scheme could potentially increase the costs of compensating consumers across the industry into the tens of billions of pounds.

Moving Forward

For motor finance firms, staying ahead of regulatory expectations means having robust processes in place, training staff on compliance, and continuously monitoring and improving complaint handling. Firms can leverage advanced technology offerings like SaaS solutions to manage and automate their customer outreach workflows. By digitizing parts of the outreach, redress, and remediation processes, firms can create operational efficiencies and accelerate necessary customer interactions. Prioritizing frictionless customer support team interactions with consumers, such as for customer authentication processes or through online customer forms, can keep good customer outcomes at the heart of their work.Karan Kapoor, Global Head of Regulatory and Risk Consulting at Delta Capita.