At the start of this year, the Financial Conduct Authority (FCA) launched a review into motor finance and since then, many have wondered if we will see a huge, payment protection insurance (PPI) style redress scheme for consumers.

The attention at the moment is on discretionary commission arrangements (DCAs), which were involved in around three-quarters of all car financing deals between 2007 and 2020. DCAs were banned by the FCA in 2021.  

In January, the FCA said: “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.”

With this review, the FCA is exercising its powers under s.166 of the Financial Services & Markets Act which allows it to “review historical motor finance commission arrangements and sales across several firms.”

The FCA will appoint a designated “skilled person” to support its investigation who will assess practices within individual firms resulting from the potential incentives created by DCAs and how those practices impacted customers. 

The FCA has also introduced temporary complaints handling rules involving DCAs which will give motor finance firms longer to respond to complaints and for consumers to make their complaints. The former applies to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.

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The latter applies where the firm sends its final response to the complaint between 12 July 2023 and 20 November 2024. The purpose of these rules is to give the FCA time, amidst the deluge of claims, to complete its review fairly and to find a proportionate solution which balances the interests of consumers and the motor finance market.

Despite the review still being in its infancy, some huge numbers are being debated – with some commentators suggesting the UK motor finance industry could be on the hook for up to £16bn of compensation.

The impact of this review is already starting to make itself known, with Lloyds Banking Group, for example, recently pointing to the “significant uncertainty” related to this investigation and putting aside £450m for potential fines and compensation to borrowers, although acknowledging that the reality of the fines could be much more, or less.

Although for comparison, the FCA reported in 2021 that the total amount of compensation paid out to customers who complained about the way they were sold PPI was £38.3 billion (since January 2011.)

The catalyst for this review has been the high number of consumer complaints regarding motor finance and it is of course, of extreme importance that any bad apples in this industry are found and properly penalised. However, it is also vital that any investigation into this industry is balanced, proportionate and appropriate. 

Much of the dissatisfaction with car finance has accelerated since the introduction of the Consumer Duty in July 2023, which sets “higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first.”

However, is it fair to view this investigation through this lens of the Consumer Duty and that this enquiry should go back so far in time and impose retrospective obligations on funders, dealers and brokers, that many would argue were not in place at the time?

This leads to another issue which is how some complaints are made. Rather than throwing the entire regulatory framework at regulated entities, it might be more sustainable for those submitting consumer complaints, by way of business to be under an obligation to particularise their complaints, rather than doing a broad sweep with every possible category mentioned.

Again, it might also be more sustainable to have a cost consequence for this approach. Subject Access Requests and complaints may be made on a seismic scale, with a significant cost attached, therefore such claims should be both clear and concise in their nature. That way remediation if due can be considered swiftly.

Another fear has been expressed of the long-term impacts for consumers of this review. If this probe goes through vast fines against the funders, and possibly dealers, could this this ultimately lead to a restriction in the finance available to consumers?

As with anything else, it is how a process is used. The FCA should target areas where there has been clear abuse. Otherwise, the cost of regulation and investigation could severely impact the availability of products to consumers.

The FCA aims to communicate a decision on the next steps by this September which will include its decision on whether or not to launch a formal redress scheme under section 404 of FSMA.

Edward Flanagan is a Partner at Shakespeare Martineau

Explainer: What is Discretionary Commission and why has the FCA launched a probe?