Reading between the lines of the FCA’s update

Following this week’s update from the FCA on its work on historical motor finance commissions, most attention has been on the proposal to extend the current pause in firms handling DCA-related complaints.

But what else can be we take from the FCA’s announcements, including a podcast interview with CEO Nikhil Rathi, and conference call with market analysts? In my view, quite a lot. This article builds on my earlier analysis here: https://assetfinanceconnect.com/viewpoint-what-s-the-likely-cost-of-the-fca-investigation/

Not all DCA cases were wrong

The FCA made clear it has yet to make any decisions, but still provided guidance that based on its work so far, an intervention – which means an ‘alternative way of dealing with DCA complaints’ – is more likely than when it started the review.

Most would accept that some use of DCAs in the market did not follow the spirit of FCA guidance that existed at the time.

But if the FCA was going to conclude that every case where DCA was used prior to the ban in 2021 was wrong, it would have done so by now. Such a high-level conclusion wouldn’t require a lot of data or need to wait for the outcome of the judicial review applied for by Barclays, or other legal cases.

The FCA also clarified that it does not see FOS decisions as ‘determinative or binding’ in terms of the approach it might take. Nikhil Rathi said on the podcast that ‘listeners should not automatically assume that we would adopt the same approach as the Ombudsman’.

In summary, it seems the FCA appears to have shifted its position from seeing this as a a ‘standard’ problem across the industry, to a more nuanced issue, needing a deeper level of analysis.

Complicated analysis will need the accountants

The FCA reports that data is taking longer to gather than it had hoped and has also been more complex than anticipated.

Even if the data can be found, many questions will arise when reviewing it. For example, even where DCA was used, did the level broadly reflect the work involved, not only face-to-face with the customer in the dealership or brokerage, but behind the scenes?  

Given each case is unique, the quantity of data involved is potentially huge, and firms cannot be expected to have kept every detail.

As we get closer to a conclusion of this review, the focus of the work involved is likely to switch from legal arguments to accounting analysis.

Impacts on the market and consumers

The FCA went far further yesterday than it has before in putting the need for any possible interventions in the wider context of promoting a competitive market and good customer outcomes.

The Statement itself only referred in passing to the need for the market to continue to work well, with effective competition. But FCA CEO Nikhil Rathi went further on the podcast and market analysts call, saying:

• When deciding what action to take, the FCA will have to consider the impact on the market now and in the future, and the need to protect consumers and ensure competition.
• The FCA will be thinking about how to ensure any action it takes supports the continued supply of motor finance to millions of consumers who depend on it.
• Any interventions will be subject to consultation and advice from the FCA’s new Cost Benefit Analysis Panel.

As brokers have been saying for a while, and recent research evidence confirms (see my previous article), prime lenders have been pulling back from the market.

Meanwhile as higher cost lenders tended to use fixed commission rates – even if they were often higher than the maximum available using a DCA at a lower cost lender – they are not exposed to potential redress arrangements.

As a result, the FCA will need to consider that many consumers are already paying more, and a significant intervention impacting prime lenders could make matters worse.

What can we expect?

As I set out in my earlier article, instead of a blanket redress scheme for all DCA cases, I expect we will see FCA and FOS eventually publish new guidance on how to assess DCA complaints, covering in part how to measure the costs involved for each agreement.

Some redress may well be required, but it seems increasingly likely to be limited to a minority of agreements, and possibly only a small minority, where DCA was used and there is evidence of unfair pricing.