Discretionary Commission Arrangements: Key Preparations

What’s Happening With DCA’s in 2024?

Motor Finance compliance developments rarely make the mainstream press. When they do – you know something big is going on. What’s happening with the FCA and Discretionary Commission Arrangements in 2024? Are we about to see the biggest complaints landscape upheaval since PPI? Here’s everything you need to know.

January 11th, 2024 – The FCA Statement

On the second Thursday of the year, the FCA released a statement titled “FCA to undertake work in the motor finance market”. The statement begins by summarising the 2021 ban on discretionary commission arrangements, removing an incentive for brokers to raise the interest rate a customer would pay on their car finance. The regulator noted that subsequently there had been a large quantity of complaints from customers who believed they had received commission-motivated higher interest rates before the ban.

The majority of these complaints have been rejected by motor finance firms who do not believe they have acted unfairly – but the Financial Ombudsman Service has reviewed some of these complaints and found in favour of the customer. They expect this to lead to a rise in the volume of these complaints.

In reaction to all of this, the FCA announced in their statement that they would be conducting a review of “historical motor finance commission arrangements and sales across several firms.”

What’s Happening Now?

The FCA review will look to establish if there has been “widespread” misconduct causing detriment to consumers. If that’s the case, the next move will be to decide how these complainants can receive “appropriate settlement[s] in an orderly, consistent and efficient way”. One immediate effect of this is that the regular 8-week deadline for resolving motor finance complaints has been paused for 37 weeks – specifically in cases where “there was a discretionary commission arrangement between the lender and the broker”.

The pause is backdated to apply to complaints received on or after November 17th of 2023, and will apply to complaints received up to and including the 25th of September 2024. On the customer side, the 6-month period to refer complaints to the Financial Ombudsman Service is being temporarily extended to 15 months.

What Happens Next?

The FCA statement includes the intention to announce next steps in the third quarter of 2024.

At present we can only speculate about what those next steps will be. How the regulator response plays out will depend entirely on what the review finds – how widespread discretionary commission arrangements were and how severely they were impacting consumers. It’s possible that this will then become a PPI style high-profile mini-industry within the complaints world, requiring significant investment from motor finance organisations both in terms of compensation and complaints resource. Given press coverage, regardless of their decision, it is near certain that we will see an increase in complaints as more consumers become aware of the situation and the possibility they will have been affected.

Another factor to consider when predicting how this will play out is the Financial Ombudsman Service’s plans for the year. Their annual plan consultation opened in December includes the possibility of them beginning to charge “professional representatives” – introducing a cost to CMCs bringing claims against Financial Services firms. That consultation closes on January 30th with the Ombudsman’s finalised plan and budget for the year set to be published on March 31st. Depending on what they decide and how large the fees are, that could seriously disincentivise large scale CMC activity on this issue regardless of the FCA decision.

What Should Motor Finance Businesses Do?

Motor Finance firms should be considering all of your current capabilities that could be effected – we could be dealing with complaints dating back as far as April 2007, think about how far back you might need to go and what data you can utilise. What do your current processes relating to DCA’s look like? What do you have in place for customers in scope? How will you defend CMC activity? What forecasts do you have in place in terms of budgeting for redress?

Earlier this week we put together some Frequently Asked Questions and Answers on the issue of Discretionary Commission Agreements, click here to read those in full.

The FCA’s “Temporary changes to handling rules for motor finance complaints” webinar today made it clear that the regulator expect firms to continue resolving all the complaints that they can and that the current extended timelines shouldn’t be treated as a total freeze – once the pause ends, complaints will be picked up at the point they were frozen so, for example, a complaint that had been with the firm for 3 weeks when the pause came into effect will need to be resolved within 3 weeks after September 25th. Right now, we would recommend motor finance firms continue responding to complaints wherever possible and start to plan ahead, carefully considering their complaints capacity.

There are some key factors to think about in terms of Complaints planning specifically. In situations where an organisation does not still hold all of the documentation relating to a complaint and the firm will be expected to conduct a full investigation and gather whatever documentation they can, examining what documentation they can retrieve from the customer and from the lender or any other parties involved.

There are also no plans at present to release any fixed templates how complaint responses. All of which paints a picture of a very involved, investigative complaints process, requiring trained, experienced and knowledgeable complaints professionals – and, depending on the FCA decisions we see later in the year, possibly a large number of them.

Kind Consultancy is currently supporting a number of Motor Finance firms in relation to DCAs, from ringfenced project teams to flexible complaints resource. For a confidential discussion about how we may able to assist your organisation, get in touch on 01216432100 or via selena@kindconsultancy.com – or you can find out more about our Kind Agile Solutions contract resource offering here

Motor Finance Regulations: Beyond Policies & Procedures

Earlier this month I wrote about the current focus on Motor Finance Regulations, especially the growing controversy around PCPs and the associated commission models.
Since then, the FCA has announced their intention to ban commission models in Motor Finance that are tied to the customer interest rates, estimating that this could save customers up to £165 million every year. Consultations on these plans are open now and will close on January 15th, with final rules set to be published later in 2020. The report mentions that the FCA is aware of these models existing in other Finance areas but not currently having reason to ban them there. After finding that many dealers were not properly informing customers that they would be making commission on a sale, the regulator is also looking to change the rules around how customers are informed of commission models, which would apply across many areas of credit outside of Motor Finance.
So how should the Motor Finance world respond to changes in Motor Finance regulations? In a response to the news the Finance & Leasing Association said many of their members were already moving away from commission models linked to interest rates. I expect right now there are plans being put in place to review systems and policies in these organisations to try to prevent any decisions which are commission-motivated and not in the best interest of customers.
But there’s another factor here – conduct. Changing internal systems is only going to go so far if an organisation has a culture that prioritises profit and sales over good customer outcomes. Conduct has been another regulatory focus area we’ve seen grow in importance, and we know regulators are looking to see a fundamental change in the culture of these businesses, to make sure that these organisations are focussing on positive customer outcomes. Under SMCR we’re seeing a lot more onus on senior managers to set a culture of positive compliance, and they can be held individually responsible for any failures on that front.

Tackling conduct and culture issues can seem more difficult and abstract than ensuring policies line-up with new FCA rules, but Kind Consultancy has worked with a number of highly experienced conduct risk professionals who are able to provide FCA liaison training and conduct risk management support across the UK on short notice. If you think your organisation might benefit from these services, get in touch for a confidential discussion of how Kind Consultancy can help you on 01216432100 or selena@kindconsultancy.com.

Selena Tye

This post is part of a series from Selena on Motor Finance, don’t miss the other entries.

Or, read all of our pieces relating to Culture & Conduct Risk here

Car Finance and Personal Contract Plans

Speculation is mounting that the car finance industry could be heading for its own mis-selling scandal as fears grow around the way in which Personal Contract Plans have been sold.

Recent reports show car dealer Lookers facing large scale mis-selling allegations as more details emerge about the FCA investigation announced in June. One of the UK’s biggest car dealers, Lookers staff are alleged to have failed to comply with their regulatory obligation to offer an alternative to personal contract plans, as well as failing to comply with “cooling off” periods following the sale of “gap” insurance. There are also allegations that the business used brokers to lease cars and those brokers may not have complied with lending regulations, failing to carry out proper checks on if buyers could afford the products they were being sold, or even if they understood the contracts they were signing.

Why are Personal Contract Plans so controversial? With a PCP, the customer pays an initial deposit and then a set monthly fee. The dealer sets a Guaranteed Minimum Future Value for the car, which represents the minimum amount the car will be worth at the end of the contract. At the end of the contract, the customer can return the car and end the agreement, begin a new PCP for a new car or pay a “balloon payment” to take ownership of the car – with that balloon figure representing the difference between the value of the car and the amount the customer has already paid. That may sound fairly reasonable, but there are multiple possible drawbacks to PCPs. Firstly, the part of the PCP relating to the balloon payment is an interest-only loan which is not paid down during the contract-  interest charges pile up fast and anyone using a PCP then paying the balloon payment will have a much higher interest bill than if they had taken on the same car through traditional hire-purchase. Second, many dealers have referred to the difference between the car’s actual value at the end of the contract and the original expected balloon payment value as “equity” or “profit” when talking to customers – when really this is just the money the buyer has already paid to cover depreciation.  In these cases, the buyer has borrowed more money than necessary and paid more interest than needed to cover the cost of depreciation.

While Lookers is the most high profile example so far, they may well be the canary in a much larger coal mine. The National Association of Commercial Finance Brokers has recently warned that many buyers could have been misled by car dealers, with the complex nature of PCPs being exploited by some dealers to make drivers believe they are getting a better deal than with a traditional hire-purchase arrangement. The NACFB has highlighted that the structure of PCPs can result in some paying much more interest than on hire-purchase arrangements, even if the APR appears to be the same, and the NACFB believes that at the moment many dealers are not making this clear to customers when offering PCP loans, which could potentially form the basis of a mis-selling claim.

If a legal basis for a mis-selling case on PCPs can be established, this could be the beginning of the car finance industry’s own PPI-level problem, with PCPs having been sold in huge volumes to both individuals and businesses. We know that motor finance has become an area of regulatory focus this year and we’re expecting this to continue into next year, in what could be the beginning of a sea change for the sector.

The FCA’s March 2019 final report on Motor Finance has highlighted potentially huge problems with “Increasing Difference in Charges” and “Reducing Difference in Charges” commission structures – and has found that as many as 95% of independent dealers, franchise dealers and online brokers are using them. Increasing DiC and Reducing DiC commission structures can incentivise brokers to arrange higher interest rates on their customer’s finance, with the amount of commission earned increasing in relation to the interest rate the customer is charged. The March 2019 report sets out that it is the responsibility of lenders to show that differences in commission given to their brokers are based on extra work being done. Consumer Credit Sourcebook rules are being tightened and there is widespread speculation that the FCA will look to ban I/R DiC commission completely, with estimates that these commission incentives may have lead to consumers being overcharged by £300 million every year.

Kind Consultancy is currently working with a number of motor finance firms providing Compliance Support, Complaint Handling and Collection Advisers.  We have extensive experience of supporting Financial Services businesses through regulatory changes and a pre-qualified bench of top-tier contract Governance, Risk, Compliance and Complaints experts who are available at short notice.

Whatever your organisation’s needs within this space, you can contact me on 01216432100 or selena@kindconsultancy.com for a confidential discussion and we can build a bespoke solution tailored to your business.

Selena Tye

To read all of Selena’s pieces on Motor Finance, click here

Final FCA Findings on Motor Finance: Cause for concern?

The publication of the FCA’s final findings on motor finance has raised alarm bells across the industry this week. Their research shows that some consumers have been overcharged by more than £1000 when taking out loans to buy cars. The FCA has suggested that a key problem is commission models which allow brokers to set customer’s interest rates in order to earn higher commission for themselves. This is especially prevalent in Personal Contract Purchases, which now make up roughly 80% of all new car finance deals, and see the customer renting their car over three or four years.

The Finance and Leasing Association claims that the FCA’s final findings on motor finance are “based largely on out-of-date information” and don’t reflect “the very considerable progress that the market has already made in moving away” from these problematic commission models, but have also said that they “look forward to working with the FCA as it modernises its regulations”. The FCA is still considering options for intervening in the motor finance market, with the possibility of strengthening current rules, banning commission models that are open to abuse and limiting broker discretion in regards to setting interest rates all being discussed at the moment.

At Kind’s own Motor Finance roundtable in December 2018, the oversight of brokers and dealers was a central topic throughout discussions. We’re now looking forward to deliberating over the final findings at our next event, which will be held in April.

Given the wide scope of the key areas involved (oversight of dealers and brokers, affordability assessments, policies/procedures/systems & controls, clear and not misleading information) all firms will need to review their current practices. A good way to start would be by way of a gap analysis and Kind Consultancy have experienced motor finance consults who will be able to support you in the initial stages and beyond. Contact Selena Tye on 01216432100 or e-mail selena@kindconsultancy.com for a confidential discussion of your organisation’s needs and how we can help.

Selena Tye

This post is part of a series from Selena on Motor Finance – catch all the entries here.

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