Is car finance fallout the ghost of PPI?

In a speech this month, Nikhil Rathi played down speculation that redress for car finance commission issues would be ‘the next PPI’.  He did, however, state that it was “improbable we will find nothing to report as we look at historic motor finance sales”. So whatever detailed findings bring later this year, there is a lot to be done to get operations ready to deal with redress programmes, and make sure compliance with ongoing regulation in the sector is where it needs to be.

The FCA focus, and FOS decisions on discretionary commission arrangements in the motor finance sector, along with the recent suspension by multiple firms from selling Guaranteed Asset Protection or GAP insurance, has put the whole motor finance sector in the spotlight.

A discretionary commission arrangement – or DCA – is an arrangement where a lender allows a credit broker to choose the interest rate on a product that is offered to a customer. The amount of commission payable to the broker is dependent on the interest rate charged, so the higher the interest rate selected, the more profit the broker makes.

DCAs were banned by the FCA in 2021, mitigating the risk of sharp practice here. But before the ban, this practice was widespread. Tens of thousands of consumers are now raising complaints with the FOS, and Lloyds alone recently confirmed it has set aside £450m to cover potential costs.

Complaints have focused on the arrangement of car financing being unfair, such as:

  • the commission model used by the motor finance firm creating a conflict of interests between the interests of the broker and the interests of the customer
  • the existence and nature of the commission being paid by the motor finance lender to the broker not being properly disclosed to the customer
  • the broker not giving the customer the best interest rate available.

After the FCA publishes its findings on its diagnostic, firms are likely to have to either enhance their complaint handling capacity, or prepare for an ‘alternative mechanism’ for providing redress for, collectively, hundreds of thousands of customers.

When the investigation was announced in January, the outcome was widely hailed as being  the PPI of the 2020s. The Chief Executive of the FCA, Nikhil Rathi has sought to downplay speculation about the costs of redress running into billions. In his speech at the Morgan Stanley European Financials Conference on 14th March he said “I do not anticipate this issue playing out as PPI did, not least because we have intervened early in the interests of market orderliness”. He also promised a “a more condensed time frame”

Complaints have been paused until 25 September 2024 to allow time for the FCA to complete its review. If the FCA concludes that there has been misconduct throughout the sector and that consumers have suffered harm, it is likely that many firms will need to design and execute complex and lengthy redress programmes, with consumers and claims management companies gearing up ahead of this date. Some firms have already started making themselves ready by setting up dedicated forms on their websites for customers to complete if they want to complain, ensuring consistent information for all DCA complaints is being collected

Are you prepared?

The FCA is liaising with the firms involved in its DCA review directly. However, even if you are not directly involved in this review, if your firm has previously sold motor finance products by means of a DCA, it would be wise to have a plan in place to allow you to react to the findings of the review. This should include:

  • being prepared to re-allocate or recruit additional resource and personnel to ensure smooth running of complaint operations whilst under increased pressure
  • ensuring staff are trained and up to speed with the requirements of DCA complaints
  • where appropriate, reviewing existing procedures, ensuring your firm has evolved to meet the requirements of the current regulatory climate

In the meantime, you still need to continue to comply with the DISP rules. This includes continuing to progress complaints involving DCAs where possible, for example where it is possible to resolve the complaint without having to consider whether the DCA element of the agreement was fair. Where a DCA is not the sole issue being complained about, you must investigate and resolve the remainder of the issues as they normally would.

We can help

We’ve worked with leading motor finance lenders, and understand the complexities of discretionary commission structures and how they can be structured. We can help you understand the potential impact of the FCA’s investigation into historic car finance loads and support your programme in the following areas:

  • Training and development: We offer comprehensive training programs to make sure your people are well-versed in the new commission structures and processes. We also offer complaints handling training and can tailor this to your organisation’s unique requirements – useful for bringing new or redeployed staff up to speed with the requirements of DCA complaints.
  • Regulatory compliance: We have a deep understanding of the regulatory framework governing discretionary commission arrangements. Our expertise will help your organisation navigate these regulations, providing assurance and recommending upgrade to existing procedures, ensuring compliance, and mitigating any associated risks.
  • Remediation planning: We have successfully optimised remediation programmes, leading to improved transparency and accountability. Our approach involves a comprehensive review of existing systems, identifying areas for improvement, and implementing streamlined processes to enhance overall efficiency.