FCA Update: Fixed Commissions Now Eligible for Car Loan Claims, Expanding Previous Scope

The Financial Conduct Authority (FCA) is considering a proposal to extend the timeline for motor dealers to address complaints about discretionary commission agreements (DCAs) in light of a significant Court of Appeal verdict. The FCA expects to release an update by mid-December 2024. This came after the Court of Appeal released its verdict regarding three landmark cases on mis-sold car finance in October, which made it clear that customers might now sue for undisclosed commissions in motor loans. The FCA’s probe could also broaden the types of claims eligible for payouts, which might cover discretionary and non-discretionary commissions.

Experts say that the decision may significantly expand the number of people who can receive car finance compensation, potentially doubling the number of impacted consumers. 

Expanded timeline, coverage in effect until Supreme Court ruling

The FCA is looking at consultations that could lengthen the period allotted for auto finance providers to respond to commission claims. This extension proposal came after the Court of Appeal decided that it is illegal for brokers to accept commissions from lenders while failing to inform clients. The FCA has proposed an extension that will give businesses enough time to properly handle the anticipated surge in claims. 

The proposal, which studies the potential length of the extension, will be implemented until the Supreme Court releases its decision on the Wrench vs FirstRand Bank Ltd., Johnson vs Firstrand Bank Ltf., and Hopcraft vs Close Brothers. 

In addition to ensuring that claims are processed in an orderly and effective manner, this move attempts to prevent disorganised processing. To ensure that complaints are addressed in time, the FCA urged consumers to file their complaints as soon as possible, especially with the anticipated increase in the number of complainants given the Appeal Court ruling.

Aside from giving motor firms time to process claims, the extension also widens what types of commission agreements consumers can claim for. Contracts with fixed commissions are now eligible for compensation, in addition to DCAs. 

While the decision significantly impacts the motor sector, companies have been cooperating with the watchdog to guarantee the equitable and uniform processing of the expected surge in claims. The regulator has already spoken to 63 firms and organised an industry roundtable to assess the impact. As the industry adjusts to the legislative change, the agency aims to ease the transition for both auto companies and consumers. 

Money Saving Expert founder Martin Lewis noted that this action might impact a far wider range of consumers than anticipated, which would result in a spike in auto loan claims and the cost of covering them. With numerous lenders putting aside substantial amounts in anticipation of future payouts, the sector is also bracing for at least £16 billion in losses due to redresses. 

In the meantime, more confusion has been created by the FCA’s decision to temporarily halt all complaints while it awaits the Supreme Court’s final decision. This could mean longer processing time for claims but offers a chance for a more comprehensive analysis of the sector, its practices, and firms’ strategies to compensate customers. 

Legislative changes shed light to consumers’ plight

The Appeal Court’s ruling on October 25, 2024, represents a dramatic shift as it deemed brokers like auto dealerships cannot get commissions from lenders without securing consent from clients. This historic decision requires that consumers express explicit and informed agreement as an indicator that they fully understand all pertinent information applied to their contracts. Disclosed details must include calculations and amounts to be paid. While the watchdog has banned DCAs in 2021, this latest ruling covers all commission agreements in the motor sector. 

According to the Court of Appeals judgment in Johnson v FirstRand Bank Ltd - which handles MotoNovo Finance - complainant Marcus Johnson found out he was paying 25% on top of his original payments, to cover the broker’s commission. Johnson paid £1,650 in commissions alone, showing how much damage the agreement brought. Johnson and millions of other customers may now qualify for reimbursements. 

The ruling is already influencing how auto finance disputes are handled, as more customers are expected to become aware that they were misled about auto financing options. There are critical ramifications for both consumers and companies from the proposed expansion of the complaint-handling time as it not only extends the coverage in terms of commission type and period of filing, but also the time of the agreement.

Mis-sold auto finance victims prior to the 2021 DCA ban also have additional time to assess their contracts and decide whether they have been misled. 

Motor firms to tighten their terms, customers to face difficulties

While existing clients who received mis-selling contracts may be able to recover some of the funds they overpaid, future customers may be facing more difficulties when getting car financing. Lenders are anticipating more fees, which could negatively impact auto deals. 

MSE’s Lewis remarked that motor firms may become hesitant to provide competitive terms and “may risk being counterproductive to consumers” due to the “potentially existential threat to consumer lending.” The changing legislative landscape for the car lending market also puts pressure on its financial stability, even after some companies have made plans to mitigate the financial consequences. 

Some potential consequences include increased interest rates or more stringent lending standards. 

In the meantime, the FCA will write to the Supreme Court to ask whether lenders will have the opportunity to appeal the ruling. Future developments to related laws, including the FCA’s findings on DCAs, are expected to create a more equitable industry.