Today (11th January 2024), the FCA issued Policy Statement PS24/1 outlining temporary changes to handling rules for motor finance complaints. The announcement from the FCA highlights the ‘urgent’ diagnostic work the FCA will carry out to assess the historical use of ‘discretionary commission arrangements’ (DCAs).
The outcome of FCA’s work will determine not only, the extent of any redress for customers but also the proposed next steps – in particular, whether redress is provided through mass claims/complaints akin to that undertaken for PPI mis-selling, or a more formal ‘redress scheme’ under s404 akin to that recently undertaken to provide compensation for those given unsuitable advice to transfer out of the British Steel Pension Scheme (BSPS).
To some extent, this is only delaying further customer redress, given the harm that has already been identified, but some may argue that the FCA requires time to consider all avenues.
What do we know from historic court cases, and why is the FCA taking action?
We are already aware that cases that have reached trial have eventually focussed on a claim under s140A of the CCA that dealers or brokers failing to disclose the amount of commission to the customer renders the lender’s relationship with the customer unfair.
In one case, the Court decided that a discretionary commission model created unfairness under the unfair relationship provisions.
In another case, the Court decided that it “is difficult to see how in practice or principle a car dealer could offer single-minded loyalty to a customer when dealing with the finance, but not when selling a car to the same customer which gives rise to the need for finance. Finance is incidental to purchasing the car for those who need to borrow“. He then dismissed the appeal against finding that the introducer did not owe a fiduciary duty to the customer.
While judges have taken varying approaches to these claims, the following tendencies are evident:
- Discretionary commission models (DiC) or where there is a high quantum of commission (over £1,000) have been upheld in the customers’ favour.
- Fixed-rate commission models and flat-fee commission models are less likely to be upheld.
- Statements by dealers or brokers that commission ‘may’ be payable are at higher risk of being upheld.
- Statements by dealers or brokers that commission ‘is’ or ‘is typically’ payable may be accepted.
The Ombudsman decisions, which have now landed as part of the FCA announcement, overturn the original complaint rejections, one with BPF (Clydesdale), the other with Black Horse and are suggestive of the Ombudsman agreeing with historic court outcomes where upwards DiC complaints have been found in the customers favour.
What are the key messages in PS24/1
- A pause on the normal 8-week time limit for dealing with complaints for motor finance lenders and brokers. The new rules pause for a period of 37 weeks the requirement on firms to provide a final response to a DCA complaint and the corresponding right that complainants have to refer their complaint for consideration by the Financial Ombudsman Service (Financial Ombudsman).
- The rules also extend the amount of time consumers have to refer DCA complaints to the Financial Ombudsman from 6 to 15 months, where the firm sent its final response within the timeframe specified in the rules.
- The Courts and the Financial Ombudsman have given insight into the likely direction of travel; however, the FCA will use the 37-week pause to the complaint handling time limits to carry out diagnostic work to assess whether the sales of motor finance agreements involving DCAs fell below applicable regulatory and legal standards, resulting in consumers being owed redress and if necessary, assess the costs and benefits of available alternative mechanisms for providing appropriate redress to any consumers who are owed it.
- The FCA are and will continue to use its powers under s166 of the Financial Services and Markets Act 2000 to review historical motor finance commission arrangements and sales across several firms.
Suggested next steps for firm
- So far, these complaints aren’t about a single type of credit agreement, and there are a number of different commission models and structures in place – as well as different business relationships involved. There is variety and complexity across different complaints, and firms should use this period to interrogate the complaints they’ve received to date to inform the likely impact and potential solutions available.
- Consider changes to current communications to customers. Maintaining a proactive and clear dialogue with customers through this period will ensure firms minimise ad hoc queries and support brand and reputational standing.
- Consider whether you may need to prepare for an influx of Data Subject Access Requests (DSARs) if Claims Management Companies (CMCs) wish to understand what type of commission model was in place for customers.
- Resource and capacity plan for the different redress scenarios which are open to firms.
- Review the Financial Ombudsman’s decisions and start to plan what a redress programme could look like, begin to gauge potential exposure, and consider provisioning sums.
