FCA delay on discretionary commission arrangements decision

Summary

The recent Asset Finance Connect (AFC) webcast, sponsored by Bynx, brought together key industry experts to discuss the Financial Conduct Authority’s (FCA) delay in ruling on discretionary commission arrangements (DCA) complaints within the motor finance sector.

The FCA’s decision to extend its review until May 2025, originally expected by September 2024, has stirred uncertainty across the motor finance industry.

The webcast featured insights from David Betteley (AFC), Rachael Jones (Auto Trader), Mike Pierce (Sytner Finance), and Wayne Gibbard (Shoosmiths), focusing on the implications for lenders, motor dealers, Claims Management Companies (CMCs), the Financial Ombudsman Service (FOS), and consumers.

FCA delays: Causes and consequences

The FCA’s postponement has been linked to multiple factors, including:

Data issues: Firms within the skilled persons review have been found not to be maintaining historical data, compounded by the complexity of managing records spread across multiple companies and systems.

Pending litigation: Key cases, including Barclays Partner Finance’s judicial review against an FOS decision, remain unresolved, alongside other civil cases awaiting judgment. The case outcomes may impact FCA timelines, but these reviews challenge FOS decisions based on procedural issues rather than the correctness of the rulings themselves.

Extended pause on complaint handling: The FCA has extended its pause on DCA complaints until December 2025, granting affected firms more time to prepare. Wayne Gibbard, partner at Shoosmiths noted: “I think it is the most realistic option and notwithstanding a number of operational pressures that it will create, it does at least give firms the opportunity to prepare and ready themselves.”

The delay could signal the possibility of an industry-wide redress scheme aimed at resolving DCA-related complaints. While the FCA has not officially confirmed an impending redress scheme, this development has become a growing concern for lenders and motor dealers alike. Firms now face a growing backlog of complaints and rising financial liability, with no clear resolution in sight.

The FCA emphasised the need for all regulated firms to ensure they have adequate resources to handle potential liabilities.

The impact on lenders and motor dealers

For lenders, the delay adds to the uncertainty, with many forced to divert resources to handle growing volumes of complaints. The potential for large-scale redress schemes could carry significant financial implications, requiring lenders to bolster their operational capacity.

Rachael Jones, director of automotive finance at Auto Trader pointed out that while the motor finance market remains strong, particularly for used cars, the delay has given consumers “further lack of clarity” and created further challenges and costs for lenders who have been forced to adapt by creating entire outsourcing businesses to manage the influx of complaints.

From a retailer’s perspective, however, the market is relatively stable, with consumer engagement in motor finance remaining at a steady level.

The role of CMCs and consumer redress

Claims Management Companies (CMCs) have historically driven a significant number of complaints within the motor finance industry. However, with the FCA and FOS encouraging consumers to approach lenders directly, the strategy of CMCs appears to be shifting. Rachael Jones noted that since February consumer interest and knowledge in the FCA investigation has dipped.

The FCA’s efforts to reduce reliance on CMCs have resulted in fewer inquiries, though CMCs are now pivoting from claims of unfairness to unaffordability.

Gibbard noted that CMCs have become less active as consumers are increasingly reaching out directly to lenders, who have streamlined the complaint process. Despite this shift, concerns remain that if the FCA introduces a redress scheme, CMCs could again see an opportunity to flood the system with claims.

The panel acknowledged that the industry’s messaging to consumers must remain clear, given the ongoing investigation and unresolved outcomes. Jones noted: “Messaging to consumers, whether it’s from CMCs, dealers or lenders, needs to be clear, honest and transparent. Trust is being lost in the industry because of the investigation and there isn’t an outcome yet. It’s up to everyone in the industry or anyone communicating about this to be clear on what is currently going on to effectively manage consumer expectations in this process.”

Data management and historical challenges

One of the most significant hurdles in the FCA’s review has been data gathering and management. Many lenders and brokers are struggling to provide data as far back as 2007, particularly smaller firms with limited resources. Larger organisations are better positioned to comply with the FCA’s requirements, but this comes at a significant operational cost.

Mike Pierce, managing director at Sytner Finance acknowledged that smaller firms lack the resources and expertise that larger companies have to deal with such issues, making compliance more difficult for them.

Pierce noted that a lot of lenders are actually going to retailers to ask for the relevant information, resulting in a lot of manual effort, time, cost and resources for the intermediaries.

Gibbard discussed how GDPR and varying record-keeping policies across firms further complicate the issue, especially when examining data from as far back as 2007. He mentioned that the FCA is aware of the difficulties in obtaining certain data, which could affect regulatory outcomes.

This data challenge complicates the FCA’s efforts to ensure regulatory compliance and customer redress. The potential introduction of a structured redress scheme, which could be based on standardised compensation formulas, underscores the importance of accurate data for both lenders and consumers.

Preparing for a potential redress scheme

A recurring theme throughout the webcast was the likelihood of a consumer redress scheme. While the FCA has yet to confirm its intentions, there is growing consensus that an intervention might be necessary.

In response to a request from Martin Lewis, Sheldon Mills, Executive Director at the FCA, acknowledged that the need for such a scheme has become more likely as the review has progressed.

A potential redress scheme could aim to compensate consumers quickly for specific circumstances, based on a data-driven approach, according to Shoosmiths’ Gibbard. This would create certainty for lenders and consumers alike, preventing further complaints once compensation is paid.

However, concerns remain that such a redress scheme could trigger a wave of compensation claims, many of which are expected to come from CMCs rather than directly from consumers.

Recharacterising the lender-dealer relationship

The webcast also touched on the changing relationships between lenders and dealers following the FCA investigation. Some believe the commission model could evolve, with increased transparency and cooperation between the two parties becoming more important, especially under new consumer duty regulations.

There may well be a correlation between the extent of any redress compensation and the likelihood of lenders attempting to defray the cost of such compensation by asking intermediaries to shoulder the burden.

Wayne Gibbard noted that the longer-term implications of this investigation would be that lender-dealer relationships would need to be recharacterised.

Concluding remarks

While the market remains stable, the FCA’s delayed decision prolongs uncertainty, leaving firms preparing for increased complaints and potential redress schemes. Firms have been advised to develop contingency plans and budget for potential liabilities while awaiting further guidance from the FCA.

Overall, the panel remains cautiously optimistic, hoping for an outcome that doesn’t severely disrupt the market, while acknowledging that further clarity on regulatory decisions is needed.

Auto Traders’ Rachael Jones aptly concluded that: “Part of the investigation talks about maintaining market integrity. And finance is an enabler for consumers buying a car, so it’s massively important that we don’t have anything destroying access to credit for consumers across the spectrum.”