The “Make-Or-Break” Moment for Motor Finance: Data Preparation

Discretionary or variable commission arrangements are a mechanism that enables brokers or dealers to raise the interest rate charged to consumers in order to earn higher commission. As a result, the charged rate often exceeds the prevailing consumer rate.

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

This practice has drawn the attention of the FCA, which aims to determine if these arrangements breach fairness principles outlined in the Consumer Credit Act and seeks remedies for historically affected consumers.

A timely and ongoing example of this is the FCA’s investigation into Discretionary Commission Arrangements (DCAs) within motor finance. The scrutiny of which is intensifying. Forecasts of industry-wide redress costs are in the billions, and reporting from news outlets and consumer advocates, like Martin Lewis, are putting further pressure on firms to act.

As firms prepare themselves for the challenges of this investigation—including identifying affected customers, estimating financial impacts, and defining end-to-end redress programs—a pivotal challenge is clear: data preparation.

The accuracy and completeness of data underpin every other aspect of the remediation process. Getting this right will ensure subsequent redress activity is as robust as it can be, and that overall costs are managed effectively.

Given the expected investigation period could be from 2007 to 2021, this will be no easy feat.

Here are the key challenges firms must overcome to get this right:

  1.  Fragmentation and Uncertainty

In the period under review, it’s highly likely that businesses will have upgraded or migrated their data infrastructures. As a result, vital data now resides across multiple platforms, significantly complicating the task of managing and consolidating this information.

As the FCA stated earlier this month, “many firms are struggling to promptly provide the data we need. Reasons for this include data being stored on multiple systems and / or being spread between lenders and brokers.”

Additionally, given that some of the data will have been captured as far back as 2007, quality will be variable, and typically where there is any uncertainty, regulatory expectations will be that the redress calculation must resort to conservative assumptions that benefit affected customers.

  1. Completeness

The FCA has noted that “in some older cases, firms have not retained all relevant records”.

This issue of data retention and completeness will inevitably have been compromised due to the passage of time and, complicating matters further, many customers may have changed their addresses without notifying their lenders, and a proportion of customers will be deceased. All of these gaps will need to be identified, segmented and managed in an appropriate way to ensure accuracy and compliance in the redress process.

  1. Maintenance and Accessibility

Assembling all of this information into a dataset that can be easily interrogated once redress requirements are known will be a significant undertaking. This dataset must be robust enough to withstand scrutiny once redress requirements are established and flexible enough to adapt as the redress program undergoes possible changes.

The scale of the initial data preparation ahead  is immense. Firms must evaluate whether they have adequate resources to handle the demands of this task, particularly after the FCA’s “Dear CEO” letter emphasis the “maintaining of adequate financial resources”. The firms that prepare early will be best equipped to handle the subsequent demands of the redress programmes, minimising risk, operational difficulties, and overall costs.

To ensure you're equipped to tackle the complexities of a redress programme, explore Jaywing's key considerations for effective preparation.