UK regulator review of historic motor finance commission sales could lead to financial hardship

UK financial regulator the FCA said it would investigate interest linked deals offered by motor finance companies following a surge in customer claims and complaints. The review will examine the current complaints process with an aim to ensure that those owed compensation receive what they are due in the best way possible.

In 2021, the FCA banned commission arrangements which incentivised brokers and retailers to charge higher interest rates to consumers on motor finance arrangements, known as discretionary commission arrangements. There has since been a surge in consumer claims and complaints against providers in relation to these arrangements, encouraged by claims management companies.

A number of complaints were refused by providers who considered that they acted fairly and that the consumer was no worse off as a result of the discretionary commission arrangement . However two recent decisions of The Financial Ombudsman Service (FOS) found in favour of the consumer rather than the provider, and the provider was ordered to pay compensation. The FCA considered that this would lead to a significant increase in claims and has paused the eight-week deadline for providers to respond to complaints about motor finance. The pause was introduced on 11 January to “prevent disorderly, inconsistent and ineffective outcomes for consumers and knock-on effects on firms and the markets” while the assessment takes place to determine the best way forward for firms and consumers, the FCA said.

Using powers under s166 of the Financial Services and Market Act 2000 (1,238 pages/ 25,327 KB), the FCA will consider how customers should receive compensation and potentially look to resolve any contested legal issues of general market importance. The FCA said that it may decide that providing redress through consumer complaints does not lead to the best outcomes for consumers or the effective functioning of the market. It could instead implement an alternative approach such as setting up an industry-wide consumer redress scheme or applying to the Financial Markets Test Case Scheme, to help resolve any contested legal issues of general importance.

The FCA also highlighted the importance of managing risk appropriately as the Financial Services Compensation Scheme (FSCS) does not protect customers who are owed money by failed motor finance providers.

Firms directly affected by the review will be required to introduce strategies to mitigate regulatory action and their exposure to customer claims and complaints. Where those firms opt to carry out proactive remediation to manage regulatory and customer risk, they will be required to ensure those schemes are not only regulatorily compliant, but also meet commercial objectives.

While some of these providers form part of large lending groups and will have the resource to address the cost of putting in place remediation plans and paying out compensation, there will be a number that fare less well, one expert said.

“The increase in claims, reputational damage and the cost of putting in place adequate remediation plans is likely to result in financial hardship for those firms directly impacted by the review, and also other market participants across the industry. Even at this early stage, we are starting to see the effects, including on the share prices of some of the largest providers. Firms and the FCA will want to consider the impact of these risks and the effect that they could have on the solvency of market participants” said James Hillman, corporate insolvency expert at Pinsent Masons.