Motor Finance Commission

There is never a dull moment in the consumer finance market. Just when the PPI commission claims were becoming a distant memory for lenders, there is now another commission headache for motor finance providers.

This time complaints relate to customers who took out car finance, including hire purchase or personal contract purchase agreements, to buy a car before 28 January 2021 where there was a discretionary commission arrangement (DCA) in place between the lender and broker (such as motor dealers) which led to the customer paying a higher rate of interest for their car loan.

What is this all about?

The FCA’s review of the motor finance market between 2017 and 2019 identified concerns over the use of DCAs that linked commission received by the broker to the customer’s interest rate under their car finance agreement and which allowed brokers discretion to set or adjust the interest rate.

The FCA identified that the DCAs could harm consumers because they create conflicts of interest, with strong incentives for the broker to earn more commission by increasing the interest rate. The FCA subsequently banned DCAs in January 2021.

Since 2019 there has been a marked increase in the number of motor commission complaints and, as at the beginning of December 2023, approximately 10,000 motor finance commission complaints had been referred on to the Financial Ombudsman (FOS). The referrals to FOS have increased because firms have been rejecting almost all the DCA complaints they receive because they consider that they have not acted in an unfair or non-compliant way and that their actions have not caused loss to customers. The FCA states in its policy statement PS24/1 that between 2019 and end of June 2023 firms had closed around 30,000 motor commission complaints.

Many customers disagree with the lenders’ decisions to reject their complaints and have referred their complaints on to the FOS. The FOS also disagrees with some of the firms’ decisions and last week issued pivotal final decisions to uphold two motor commission complaints. Although FOS decisions are based on the specific facts of individual cases, it is inevitable that these two decisions will alert others to the possibility of receiving redress for the way their motor finance agreement was sold, significantly increasing complaints.

These two FOS decisions can be found here and here. The decisions set out FOS’s reasoning for upholding the complaints and the regulatory and legal position as they see it.

The FOS determined that appropriate compensation would be for the customer to receive back the difference between the payments they made under the finance agreement at the higher rate of interest (which included broker commission) and the payments they would have made had they received the lowest interest rate from the lender (with zero discretionary commission for the broker), as well as eight per cent (8%) simple interest on the overpayments over the life of the loan. Any future repayments due would also be reduced to the lowest available interest rate. In a nutshell, it seems that the amount of the brokers DCA commission is being refunded plus statutory interest.

Given the number of motor finance agreements involving DCAs, (the FCA states on average, between 2007 and 2020, approximately three quarters of all agreements had a DCA of some description), the FCA anticipate that there could be many more complaints which could also potentially be referred to the FOS.

What steps the FCA are taking

Due the volume of complaints, and to manage this matter in as orderly way as possible, the FCA announced yesterday that it is taking the following interventions:

• urgently carrying out diagnostic work through s.166 Financial Services and Markets Act 2000 (FSMA) skilled persons reviews at identified firms to review historical sales of motor finance agreements involving DCAs. The diagnostic work will help the FCA determine if there is likely to have been a widespread failure to comply with relevant requirements that has caused financial loss to consumers and, if there has been failure, the potential number of consumers who could be owed redress, the potential amount of redress that could be owed, whether the FCA need to take any action to ensure redress is provided to consumers in an orderly, consistent and efficient way, and whether the FCA needs to provide further support to the FOS given the potential complaints volumes it could receive.
• introduce an immediate introduction of a 37 week ‘pause’ to the 8-week time limit for motor finance firms to provide final decisions on motor finance complaints. This pause lasts until 25 September 2024 but could be extended. The FCA’s aim during this ‘pause’ is to use this time to carry out diagnostic work and determine how to resolve any issues so that the complaints can be dealt with in a consistent, efficient and orderly way.
• if customers have already complained to their lender and are unhappy with the response, the FCA is allowing customers longer to take their complaint to the FOS. Customers usually have to take their complaint to the FOS within 6 months of getting a final response from their lender, but this is now extended by up to 15 months if a customer was sent a final response between 12 July 2023 and 20 November 2024.

We think it will be important for the FCA in considering any proposed redress and scheme to take account of the complexity of the issues, including the reality of the circumstances surrounding a customer’s decision to take out the finance, the market and rules in force at the time of entering the finance agreement, such that the approach to redress is not unduly simplified.

Links can be found here to the FCA’s statement and full policy statement – PS24/1 Temporary changes to handling rules for motor finance complaints and to the webpage that the FCA has published for customers.

What actions firms might want to take

There is a lot to unpack with this matter and for affected firms to do, which includes:

• updating the information currently published for customers on complaints handling processes to ensure consumers are informed of the changes to time limits and the FCA website
• informing complainants about the changes to time limits for complaint handling and FOS referrals. This includes where the firm has already acknowledged the complaint or sent a final response  
• continue to progress complaints about DCAs during the pause to time limits by continuing to investigate and collect evidence to help with their eventual resolution  
• keeping complainants informed of the progress in resolving their complaint
• preserving any records held with the lender and all intermediaries that are, or could be, relevant to the handling of existing or future complaints or civil claims relating to agreements with DCAs entered into before 28 January 2021. This is regardless of whether the customer has complained or not. This requirement applies until 11 January 2025, one year from when this new rule comes into force 
• identifying customer accounts and loan agreements from the relevant period to identify instances where interest rates were adjusted leading to potential overcharging. This will help in understanding the extent of potential exposure and affected customers
• reviewing how your firm has handled previous motor commission complaints. Assess if these have been correctly or incorrectly rejected and address outcomes accordingly
• developing plans to manage further customer complaints to ensure that the relevant team is equipped to handle complaints efficiently, adhering to regulatory requirements, and providing timely responses
• developing plans and resources to be able to respond effectively to any regulatory interventions
• considering the FCA’s framework document FG20/1 on the role of financial resources in minimising harms and practices firms can adopt when assessing adequate financial resources, to help with the firm’s ongoing assessment of whether their financial resources are adequate.

How we can help

We can help you with handling volume complaints and with assessing and managing these in an effective way, and with implementing and managing a remediation programme that will help with ensuring your customers receive fair and good outcomes in accordance with regulatory requirements and expectations.

Please feel free to reach out to us if you would like to discuss this client alert and/or explore how we can help you.