The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

Whilst the Conduct Review takes place, the FCA has made temporary changes to complaints handling rules, effectively putting a pause on firms response to complaints relating to DCAs for nine months. This follows two decisions from the FOS concerning discretionary commission arrangements (DCAs) in the motor finance sector.

The Conduct Review and temporary rules are the regulator’s response to a high number of complaints from customers to motor finance firms, claiming compensation due to historical, potentially unfair, commission arrangements – but what are the likely impacts of these for firms in the consumer finance sector?

Impacts for firms

Over recent years, many firms in the motor finance sector have received significant numbers of complaints and claims (for example under the ‘unfair relationships' provisions of the CCA 1974), relating to historic DCAs and other historic conduct.

The FOS’ recent decisions, upholding two complaints concerning certain specific historic DCAs (see here and here) are expected to prompt a significant increase in complaints from consumers relating to motor finance. However, the read-across implications of these decisions for firms in the consumer finance sector outside motor finance, should not be underestimated. Viewed in the context of the Consumer Duty and DISP, there is likely to be a ripple effect of these decisions (and the outcome of the Conduct Review) for firms across the consumer finance sector.

For a number of firms, there is the obvious potential for the FCA to require significant redress to impacted customers. In a statement regarding the announcement, the FOS explained that it has heard from more than 10,000 people who fear they were charged too much for their finance and knows many more who are “waiting in the wings”.

If, as a result of its section 166 review, the FCA finds there has been widespread misconduct and that consumers have lost out, it will identify how best to make sure people who are owed compensation receive “an appropriate settlement in an orderly, consistent and efficient way” and, if necessary, resolve any contested legal issues of general importance. Such intervention may be by way of ‘consumer redress scheme’ under s.404, FSMA.

For firms across the consumer finance sector who may have operated DCA arrangements historically, there are critical steps to take now; from making the operational enhancements required to address a surge in complaints; completing (or updating) impact assessments across historic and current portfolios; determining the extent of any proactive customer engagement; reviewing present governance arrangements to prepare for potential redress; developing outline remediation strategies (including identifying resource and other dependencies, so as to ‘operationalise’ any required remediation at pace in due course); and assessing the extent of the impact on litigation strategy.

What are the identified customer harms?

The FCA has previously found that DCAs can harm consumers as they create conflicts of interest, with strong incentives for the broker to earn more commission by increasing the interest rate – leading it to ban DCAs in January 2021. The FOS, in its recent decisions, identified certain ‘inherent conflicts of interest’ and failures to treat customers fairly in connection with the operation of the relevant DCAs.

The existing eight week deadline for motor finance firms to provide a final response to relevant customer complaints has been paused during the FCA’s review in order to prevent disorderly, inconsistent and inefficient outcomes for consumers while the issue is assessed. Managing these risks is particularly important since, in line with most types of consumer credit, motor finance is not protected by the Financial Services Compensation Scheme. Firms will, of course, also need to consider their obligations under the FCA’s new Consumer Duty, including the requirement to avoid causing foreseeable harm to consumers.

Firms affected by the newly announced changes will need to familiarise themselves with, and ensure they are able to comply with, all of the temporary rules in Appendix 1 to PS24/1 that are relevant to their business. Appendix 1 creates new “relevant motor finance DCA complaint handling rules” within the FCA’s Dispute Resolution: Complaints sourcebook (DISP), which apply from 11 January 2024 and include rules on communicating with consumers and complainants as well as record-keeping requirements. The FCA is inviting feedback on the impact of the rules and its approach to the provision of redress for harm caused by DCAs more generally, until 11 March 2024.

Read-across implications

There are also read-across implications of the FOS decisions to firms operating outside of the motor finance space. One of the points raised in both decisions is that the use of a discretionary commission model created an inherent conflict of interests, as the broker was incentivised to set a higher interest rate than the lender would have accepted. Another is that the lender, by introducing and operating the DCA on the terms it did, acted contrary to FCA guidance that differential commission rates should only be offered where they are justified based on the extra work involved for the firm – and in doing so failed to treat the customer fairly, as required by Principle 6. Both the lender and the broker were also found to have failed to adequately disclose the DCA structure which created an inequality of knowledge and understanding. Firms using discretionary commission models should consider these themes and ensure their use of these models would not trigger any of these concerns.