On Friday, after markets closed, the Supreme Court published their decision on three appeal cases concerning commission payments (Discretionary Commission Arrangements) made by lenders to car dealers. Here are five crucial takeaways you need to know:

1. The Supreme Court sided with lenders in two out of the three cases, reversing the earlier rulings. The ruling says that “at no point did the dealer give any kind of express undertaking or assurance to the customer that in finding a suitable credit deal it was putting aside its own commercial interest as seller” – rebutting the earlier judgement which had suggested dealers had a fiduciary duty to put customers needs above their own.
2. But the court did find in favour of the consumer in the “Johnson vs FirstRand Bank” case – they said that the 55% commission payment (based on the total charge including interest and fees) was so high that it was a “powerful indication” that there was an unfair relationship. They awarded the complainant the amount of commission plus interest.
3. If all three cases had gone in favour of the consumers and the (now banned) practice of discretionary commission agreements was declared inherently unfair, there would potentially have been scope for a PPI-level compensation scheme. That scenario, which many were preparing for, is now ruled out. However, with the decision that very large commission agreements were “unfair” there will be many consumers who do qualify for some compensation.
4. The FCA announced on Sunday that they will open a consultation by October on a compensation scheme, and that if that goes ahead the first payments will be made in 2026. That consultation will need to establish rules on which commission payments are and are not unfair and how much compensation should be paid.
5. Right now, in these early stages, the FCA estimates that individual consumers will most likely receive less than £950 per agreement, and that the scheme will cost a total of somewhere between £9 billion and £18 billion.

We know a lot more than we did this time last week about the future of the motor finance complaints situation – but until the outcome of the October consultation and creation of the scheme and the related rules, there is still a lot of uncertainty.

For a confidential discussion about your organisation’s complaint handling resource needs, contact us on 0121 643 2100 or via our enquiry form.

Find out more about our work in the Complaints space here and for more background on Discretionary Commission Arrangements, read our past coverage here and follow Kind Consultancy on LinkedIn to stay up to date on all of our news.

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

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