On 9 May 2024, the Financial Conduct Authority (FCA) published a notice of undertaking under the Consumer Rights Act (CRA) 2015 in connection with consumer motor finance agreements issued by Mercedes-Benz Financial Services (UK) Limited (MBFS).
The undertaking required by the FCA in this case is the latest illustration to firms of the FCA’s willingness to act where it identifies instances of consumer-facing terms that fall below the standards required by the CRA.
What was the problem?
The FCA reviewed a sample of MBFS’s motor finance agreements and were of the opinion that the excess mileage term was unclear if the consumer returned their vehicle part of the way through a 12-month period, for example, in the event of a voluntary termination.
Specifically, the FCA believe that the average consumer could interpret the term “…calculated using the annual permitted mileage stated in this agreement for each year or part of the year between the start date and the date of return” as meaning that the entire annual permitted mileage allowance could apply for part of that year. As such, the FCA are of the view that the average consumer would be unable to calculate the costs arising from this clause since it was unclear what the permitted mileage would be and whether there would be any excess mileage charges as a result.
The FCA were also concerned with the wording of the excess mileage term used in previous motor finance agreements. Whilst these historic versions stated that the calculation was “pro-rated for part years,” the FCA believe it was unclear whether the permitted mileage would be pro-rated on a daily, weekly, or monthly basis.
In accordance with Section 69 of the CRA, where a contract term could have different meanings then it must be applied in the way that is most favourable to the consumer. The FCA are of the view that MBFS have not done this.
So, what undertakings has MBFS committed to?
Considering these findings, MBFS has:
• agreed new contracts entered into from 31 December 2024 will contain an excess mileage term which will more clearly explain how the excess mileage charge will be calculated;
• agreed not to rely on the term in any of its existing contracts and has assured the FCA that where the contract has been voluntarily terminated it has not relied on the term since January 2022; and
• voluntarily agreed to conduct a redress exercise to identify consumers who have been affected by the unclear term in contracts entered into since 1 January 2014 and to provide redress where appropriate. To date this exercise has led MBFS to estimate that redress will be paid to approximately 4,700 consumers.
MBFS has also voluntarily agreed to refund consumers affected by the unclear term since 1 January 2014. The firm expects to contact affected consumers by the end of December 2024.
Why can the FCA challenge contractual terms?
Although a ‘conduct’ regulator, the FCA can challenge firms using contractual terms that they consider are not fair or transparent under Part 2 of the CRA. As part of their supervision of firms, they review contract terms including those referred to them by consumers, enforcement bodies and consumer organisations. This has led to MBFS undertaking to replace the term that the FCA consider is likely to lack sufficient transparency.
The FCA also has a duty under Schedule 3 of the CRA to notify the Competition and Markets Authority (CMA) of the undertakings that they receive. As such, they publish the undertakings on their website, naming the firm, specifying the term(s) identified, and referring to the part of the CRA that relates to the fairness and transparency of the term(s).
And finally, under Consumer Duty, the FCA want to ensure that customers are given the information they need at the right time and presented in a way they can understand to enable them to make informed decisions. More on this in a moment.
What is the FCA’s approach to reviewing contractual terms?
The FCA’s Unfair Contract Terms Regulatory Guide (UNFCOG) sets out the FCA’s approach to assessing the fairness of a contract term. In UNFCOG 1.3.4(2), they state that, in deciding whether to ask a firm to undertake to stop including a term in new contracts and/or to stop relying on it in concluded contracts, the FCA will consider the full circumstances of each case, this may include:
• whether they are satisfied that the contract term may properly be regarded as unfair within the meaning of the CRA;
• the extent and nature of the detriment to consumers resulting from the term or the potential harm which could result from the term; and
• whether the firm has fully cooperated with the FCA in resolving their concerns about the fairness of the particular contract term.
And as referenced earlier, the FCA will also look at contractual terms through a ‘Consumer Duty lens’ to determine whether your customers to which these communications/terms are aimed at, are likely to understand them.
What actions should firms take?
The Principle behind the Consumer Duty is that a “firm must act to deliver good outcomes for retail customers”. This sounds sensible – after all, who would object to the idea to helping customers achieve what they want? But its implications are far-reaching, particularly since the FCA require evidential proof that good outcomes have been achieved.
In accordance with Consumer Duty outcome 3 (customer understanding) the FCA wants to make sure that customers are given the information they need, at the right time, and is presented in a way they can understand. The idea is that if customers fully understand, they can make properly informed decisions. Therefore, in the spirit of Consumer Duty outcome 3, firms should mitigate the risk of being required to provide undertakings similar to MBFS by testing their existing consumer-facing terms, and any consumer notices – not just for compliance with the requirements of the CRA – but more importantly, whether customers actually understand the terms to which they have signed up to. As such, firms should undertake outcomes testing to determine whether their terms and key features are understood by customers. This is crucial to not only evidence customer understanding but to act as an early warning indicator of issues such as those set out in the MBFS undertaking, allowing the firm to take corrective actions.
Firms should also have due regard to the material published on the FCA’s “unfair contracts” web page. This contains all of the FCA’s work on unfair contract terms including past undertakings, agreements, and other undertakings. Even if firms have not given an undertaking or been subject to a court decision, they should remain alert to undertakings or court decisions concerning other firms as part of their risk management. These will be of potential value in showing the likely attitude of the courts, the FCA, the CMA or other regulators to similar terms or terms with a similar effect.
Firms should also read the CMA’s guidance on the unfair terms provisions of the CRA. The CMA has a leadership role in relation to the enforcement of unfair terms legislation and their guidance is intended to apply to all businesses, including those in the financial services sector, which use contract terms and notices with consumers. The guidance sets out the CMA’s views on how the law is intended to operate, although firms may also wish to seek their own legal advice on unfair contract terms to take account of developments in legislation and relevant case law.
And finally, by virtue of the FCA publishing undertakings on its website, they may attract more consumer complaints. So, firms should ensure that their complaints operating model and complaint handling resource is sufficiently robust to deal with an ever evolving and increasing motor finance complaints landscape.
How can Square 4 help?
Outcomes testing and assurance
As we have already said, Consumer Duty outcome 3 is all about customer understanding. This means firms need to go beyond the existing FCA Principle 7 ‘clear, fair and not misleading’ when communicating with customers. Specifically, that communications (and yes this does include contractual terms and conditions) should be understood by the ‘average’ retail customer intended to receive them, while also tailoring these to more specific customer information needs and characteristics, including vulnerability, the complexity of products and the communication channel used.
Outcomes testing is an integral pillar in the toolkit to test and evidence customer understanding through a product and customer journey lens, identifying root causes of harm and prompting proactive action to fix, mitigate and remediate customer harm.
Square 4’s Advisory practice comprises regulatory specialists with a proven track record of supporting firms across the consumer lending sector with the development and implementation of outcomes testing. Whether that’s designing, implementing and deploying an outcomes testing framework or conducting outcomes testing independently to provide expert assurance on the quality of your customer outcomes and the levels of customer understanding, our regulatory subject matter experts can help.
Complaint handling and resource
We are aware that the market is already being inundated with commission related complaints. However, good conduct and good complaint outcomes are central to the FCA’s Consumer Duty agenda, and being prepared for the volume of complaints that may result from publication of this undertaking is essential – whether that’s ensuring your complaints operating model is effective and or having suitably skilled resources to deal with these complaints.
Square 4 provides experienced resources to support complaint handling operations and has supported numerous firms across the motor finance sector. We are experienced in managing the tactical deployment of small teams as well as providing resources for complex, large-scale complaints operations. Our industry networks and affiliations ensure the right person for the right role, supporting on-site or using our remote-based working capability.
Remediation and redress
If your firm has identified a need to undertake a remediation exercise off the back of this undertaking, you must have the necessary governance arrangements and skilled resources in place to ensure that the review is promptly undertaken to robust regulatory standards.
Undertaking such an exercise can be a huge task, expensive and a considerable business distraction. At Square 4, our team of experienced regulatory experts, have significant experience in providing independent oversight and challenge to firms, helping to ensure that any remediation programme is delivered efficiently, to regulatory deadlines and standards and that customers are treated fairly.
If you would like any more insight or information, please contact Darren Fisher (Advisory Director) at dfisher@square4.com or Tom Jeffery (Advisory Director) at tjeffery@square4.com.
