FCA to Review Historical Motor Finance Commission Deals; Pauses 8-Day Deadline for Firms to Respond to Complaints

The Financial Conduct Authority is set to investigate historical commission agreements and sales across the motor finance industry to identify potential widespread misconduct and consumer losses, the financial watchdog said in a statement on Thursday (11 January 2024). The authority is also pausing the deadline for companies to respond to applicable car finance complaints, and extending the time for consumers to escalate their complaints to the Financial Ombudsman.

The FCA states that if it finds widespread misconduct in the motor finance sector and consumers were adversely affected, it will assess the best way to ensure people will be properly compensated and, if necessary, address any significant legal disputes.

The investigation involves complaints related to HP and PCP claims over car finance deals made before 28 January 2021. It does not involve PCH agreements.

The FCA intends to provide an update on this matter by 24 September 2024.

More Time for Lenders to Respond to Complaints

The FCA is putting a temporary hold on the eight-week deadline that motor finance companies usually have to respond to certain customer complaints. This will last for about 9 months (37 weeks) or until around September 25, 2024.

The pause only affects complaints related to motor finance deals where there was a discretionary commission agreement between the lender and the broker. It will also only apply to customer complaints that the lenders received between 17 November 2023 and 25 September 2024, inclusive.

Here are some examples of when companies must respond to customer complaints:

• If the company receives relevant car finance claims or complaints within the pause period, its eight-week period to respond will start on 25 September 2024 and expire on 20 November 2024.
• If the company has been dealing with a relevant complaint for five weeks at 11 January 2024, it will have to respond within three weeks after 25 September 2024.

According to the FCA, the 37-week pause will allow it to assess the issues and determine any necessary further action or legal steps. The pause may also be extended if the financial watchdog needs more time to ensure complaints are addressed and consumers are properly compensated.

The FCA encourages companies to continue addressing the relevant complaints during the pause as much as possible by collecting evidence and assessing the cases to obtain their eventual resolution.

Extended Time for Consumers to Bring Cases to FOS

The FCA also extends the time for consumers to bring up their car finance complaints to the Financial Ombudsman Service from the usual 6 months to up to 15 months. This extension applies to the following complaints:

• Those that the lenders had sent their final responses between 12 July 2023 and 10 January 2024, inclusive; or
• Those that the lenders will send their final responses between 11 January 2024 and 20 November 2024, inclusive.

FCA to Look Into Historical Motor Finance Deals

FCA’s decision to investigate the motor finance sector is in accordance with the s166 of the Financial Services and Markets Act 2000 or the “skilled person review” where the FCA will appoint an independent expert to review the activities of financial firms are meeting their legal and regulatory obligations, and are acting in the best interests of their customers.

The investigation into the motor finance sector is the FCA’s initiative in line with its legal obligation to ensure consumer protection, preserve market integrity, and maintain competition for the benefit of consumers.

The significant dispute between the consumers and some motor finance companies whether the firms have violated regulatory and legal requirements has prompted the financial regulator to investigate the historical claims on commission agreements.

In 2021, the FCA abolished discretionary commission arrangements which have incentivised dealers and brokers to increase customers’ interest rate on their motor finance. The agency also mandated the companies to review their practices and resolve any identified harm to the consumers.

Following the ban, there are a “high number” of complaints from customers who have entered into car finance deals prior to the ban and who believed they were charged too much, according to the FCA. In most complaints, however, companies are denying that they have caused any loss to their customers or acted unfairly based on applicable regulatory and legal requirements.

There were at least 10,000 customers who have expressed concerns about being overcharged, according to Abby Thomas, Chief Executive at FOS.

After assessing some of the complaints rejected by the motor finance companies, the Financial Ombudsman has ruled in favour of the complainants in these two cases:

• In the Mrs Y vs Black Horse case, the complainant bought a used car in 2016 with a hire purchase agreement. The Ombudsman noted that Mrs Y could have been set up with a 2.49% rate with the finance agreement, but she was paying 5.5% interest instead.
• In Miss L vs Barclays PF, the complainant bought a used car in 2018 through a conditional sale deal which could have cost her 2.68% in interest, but she was paying 4.67% interest instead.

The verdict in these cases, in favour of the consumers, prompted a significant increase in the number of relevant PCP claims and car finance complaints to the companies and the Financial Ombudsman.

The County Courts have also been dealing with car finance claims, some of which have been approved.

If the investigation into the historical agreements in the motor finance sector reveals widespread misconduct that adversely affected consumers, the FCA said it will establish an “orderly, consistent and efficient” method for consumers to receive appropriate compensation and settlement.

Industry Reactions

The FCA’s investigation is foreseen to lead to “the new PPI” with a compensation that could go around £40 billion, according to Martin Lewis, founder of MoneySavingExpert.com and a consumer champion, referencing to the payment protection insurance scandal that led to Britain’s largest consumer redress scheme with more than £38 billion paid to claimants as of 2020.

As seen with the PPI scandal, any discovery of widespread mis-selling could lead to the motor finance companies to be hit with huge costs for compensating consumers. Some of the biggest players in the country’s car finance industry include high street banks like Santander, Barclays, and Lloyds Banking Group.

It is reported that 57% of the UK’s motor finance sector is accounted for by Santander, Black Horse (a Lloyds subsidiary), and MotoNovo.

Car finance agreements have been a popular option for people who want to purchase new or used vehicles in the past years. In fact, at least 80% of the car purchases were done through these deals, which included hire purchase and personal contract purchase arrangements. These types of finance deals allow many customers to pay a deposit and a monthly fee with interest, and later on, decide whether to own the car or change to a different vehicle.

The FCA is expected ultimately to either publish guidelines for which lenders must pay out redress to those who complained, or establish a compensation scheme where all companies must pay redress to all affected customers whether or not they have complained, Lewis predicted.

With the complexity of the claims, it’s understandable for a majority of the motor finance claims submitted to the ombudsman were filed by claims management companies and law firms on behalf of individuals seeking compensation. These companies typically get a cut of any compensation if the case succeeds in the consumers’ favour. These claims management companies could also target people who may have mis-sold deals, leading to another PPI-style campaign.

The Finance & Leasing Association expressed that it welcomed the FCA’s announcement, stating that it will cooperate with the FCA in the next months “to resolve this issue.”