March 27, 2024

Stay Up to Date with FCA Policy

Discretionary commission is a hot topic for the financial regulator. Make sure you don’t fall foul of the new review into past practices.

At a time when the car industry is settling back into more normal times, with new car production returning to pre-COVID levels, another bombshell has been dropped. On 11 January 2024, the FCA published the policy statement PS24/1 without consultation. The statement sets out temporary changes to handling complaints regarding motor finance cases due to a notable rise in complaints against motor finance companies – encouraged in no small part by claim management firms.

The FCA has noted that too many complaints have been rejected by motor finance companies on the basis that the companies don’t feel they have acted unfairly or caused their customers loss based on the applicable legal and regulatory requirements at the time.

The Financial Ombudsman Service (FOS) has recently found in favour of the complainants in two cases.

It refers to the rate of interest that a customer may have otherwise been able to access without the commission structure, but with no reference to the customer’s credit rating or the process of matching a funder to the customer or the prevailing interest rate at the time.

In one case, the customer had already been turned down by other finance companies on the same deal. Nevertheless, this is likely to cause a significant rise in complaints.

The Core Issue

The FCA has now decided to review historic commission arrangements, potentially back to 2007 and up to January 2021, when discretionary commission arrangements were banned. This prevented introducers (car retailers and brokers) from being able to influence the interest rate offered to a customer and, in turn, the commission paid to them.

The FCA feels that 75% of car finance agreements between 2007 and 2021 would have some form of discretionary commission model. I would suggest that this is unlikely to impact the vast majority of new car finance agreements as they have been using a fixed rate, often a rate that’s subsidised by the OEM. Therefore, the focus will be firmly on used car finance.

It’s also worth noting that some motor finance companies will be able to successfully defend actions as they have always used a fixed rate of interest, with no intervention by introducers.

Therefore, customer rates will be consistent and transparent, albeit sometimes geared to the customer’s creditworthiness.

Equally, other finance companies moved to a fixed-rate offering well before the FCA’s January 2021 ruling, which will mitigate the number of successful claims. Some finance companies have already publicly stated that they have never used discretionary commission arrangements, including Advantage Finance, Billing Finance, First Response Finance, Lombard, Moneybarn, and Specialist Motor Finance.

But make no mistake, the number of agreements based on discretionary commission is considerable and at a level that could prove hugely damaging to other motor finance companies. One positive is that the FCA has stated that consumers should not need third-party help, such as claim management companies, but should liaise directly with the lender.

FCA Action

The regulator is making changes and has announced the following measures:

  • A pause to the eight-week deadline for motor finance companies to issue a final response to a customer complaint. This pause will apply to complaints relating to discretionary commission arrangements between the funder and its introducers. It will last for 37 weeks provided the complaint was received by firms on or after 17 November 2023 and on or before 25 September 2024.
  • An extension of nine months for consumers to refer their complaint to FOS, giving them 15 months rather than the normal six. The extension applies to complaints where a firm has sent a final response during the period 12 July 2023 to 10 January 2024, or where the firm sends a final response between 11 January 2024 and 20 November 2024.

The FCA has urged firms to continue to investigate complaints relating to discretionary commission arrangements and collect evidence, using the two FOS decisions to guide them on the FCA’s desired approach.

It encouraged feedback from firms and other stakeholders on the impact of its approach in terms of redress. Feedback was required no later than 11 March 2024. The FCA will then publish its decision on next steps on 24 September.

Future Impact

The potential cost of any successful claims could be substantial and one pundit estimates that the overall impact to the retail motor finance industry could exceed £1bn. Banks with motor finance businesses have already seen a reduction in their share price since the FCA announcement and could be considering their long-term strategy. But independents will be equally concerned.

I feel that the OEM captive finance businesses’ portfolios of agreements are relatively protected by the scale of new car agreements, which are unlikely to be challenged, and several captives moved to fixed rates some time ago. But I would suggest that for all motor finance funders, the greater financial and market risk will exist with their used car portfolios.

On the positive side, since January 2021, no discretionary commission arrangements have been in existence and, coupled with a thorough review of processes to ensure firms are treating customers fairly, the outlook should be far brighter.

Equally, new entrants may see the opportunity to enter the retail motor finance arena without the issues arising from a legacy portfolio. Coupled with the benefit of the latest technology, this may make the cost of market entry attractive.

For car dealers and brokers, it’s currently unclear as to their potential liability, and a lot will depend on the fine details of their formal written arrangements with their lender panel and subsequent rulings from the FCA if they feel that an introducer has acted inappropriately or not disclosed important information. Regardless, there will be concern for the future, as finance commission remains an integral part of a car retailers’ profitability, especially with rising fixed costs and a reduction in servicing revenue with the ever-rising numbers of EVs.

And Another Thing

To add to concerns, the FCA has recently announced an investigation into guaranteed asset protection (GAP) sales at point of sale. It has stated that it’s not its intention to ban sales within showrooms, but there is no doubt that it will be reviewing the product as to its fairness and value to consumers. Fairly priced GAP insurance is a very good product for consumers and there needs to be great caution in terms of the FCA investigation to ensure that this product remains available to consumers to protect their asset and provide peace of mind.

We should not forget that, over the years, retail motor finance has been a beneficial source of finance for consumers at point of sale, providing them with a choice of financial products and repayments to suit their budget. And being a secured agreement in many cases has allowed the customer to purchase a car, whereas an unsecured loan from their bank may not have been offered to them.

Therefore, while acknowledging and not marginalising the FCA’s investigations into pre-2021 cases, we should not let the industry be demonised by claim management companies. This is because consumers now benefit from very rigid processes to protect them, taking account of vulnerability and affordability, as well as greater transparency and consistency.

To Be Continued

Automotive never seems to be far from the next challenge, and this is the next one. We face a number of months before we know the true extent of the FCA’s findings and subsequent rules regarding the treatment of discretionary commission arrangements.

Work certainly has to start now to be able to defend against unreasonable claims and seek out the relevant evidential paperwork – a huge task considering the investigation goes back 17 years. Equally, where it has been found that a customer has clearly been unfairly treated, we will have to accept the consequences. I feel this is going to be a topic we will come back to regularly.

This article was originally written by Peter Cottle and published in the March edition of IMI MotorPro magazine.

For more information contact:

Peter Cottle, Consulting Director, Finativ


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