Motor Finance complaints review: What’s happened and how will it impact your company

Described by consumer rights expert Martin Lewis as the next “PPI scandal”, here we investigate what’s happened, what the regulator has decided to do and how it could impact your business.

How has this come to pass?  

The decision comes just three years after the FCA banned discretionary commission arrangements (DCAs) and came after an extensive review by the regulator into the practice. Of particular concern was how the models which linked broker commission to the customer interest and allowed brokers wide discretion to set the interest rate.  

It, in turn, found these incentives have a significant effect on the cost of motor finance for consumers, even after controlling for other factors that could affect interest costs such as the customer’s credit score, loan value or length of the agreement.  

As a result and in October of 2019, the FCA launched a consultation process to ban such commissioning models, the conclusions of which were published in July the following year.  

It confirmed it would be introducing a ban on “discretionary commission models”, and said it expected motor finance firms to negotiate alternative commission structure – adding it had deliberately not specified which commission model as this would be a matter for firms.  

Overall, the move was designed to be “relatively minor”, low cost and result in refinements to firms’ existing practices. The regulator also asked companies to review their practices and, where harm was identified, to address.

The rules came into effect in January 2021.  

Why are Motor Finance companies now under review from the regulator?
The review has arisen as there’ve been a number of complaints from customers to motor finance firms claiming compensation for commission arrangements prior to the ban, with firms rejecting most of these because they consider they’ve not acted unfairly nor caused their customers loss.  

However, the Financial Ombudsman Service (FOS) recently found in favour of complainants in two recent decisions – namely from Black Horse and Clydesdale Financial Services. In both cases – one taking place in April 2016 and the other in November 2018 – the providers were ordered to pay compensation to the complainants.

In both of these cases, the business allowed the broker to set interest rates without the prior knowledge of the complainant. 

According to the FCA these cases will likely to, in turn, prompt a “significant increase in complaints” from consumers to firms and the FOS. Additionally, claims have also been brought in the county courts – some of which have been upheld – meaning there’s been a “significant dispute” between some firms and their consumers as to whether any legal and regulatory requirements have been breached.  

What has the FCA decided to do?
As a result, the FCA has used powers under the Financial Services and Markets Act to review historical motor finance commission arrangements and sales across several firms. If it finds widespread misconduct and consumers have lost out, it’ll identify how best to make sure people who are owed compensation receive an appropriate settlement in a “orderly, consistent and efficient way”.   

As part of this work, the regulator has introduced temporary complaint handling rules that mean firms will not have to continue closing these complaints within the usual eight-week time limit – giving the regulator time to carry out diagnostic work and determine how to resolve any issues.  

The reason for this was because of the potential large scale of individual complaints in this area, with it concerned about the risk that this could lead to disorderly, inconsistent and inefficient outcomes for consumers, firms and the market.  

This pause will last for around 37 weeks, ending on 25 September – this means, unless the firm decides to respond to their complaint, consumers will be unable to refer their complaints to the Financial Ombudsman. 

However, once the pause ends, the eight-week time limit will be reinstated, and consumers will again be able to refer complaints to the Financial Ombudsman.  

Complaints that are subject to the pause include those made during the pause and those received by a firm on 17 November onwards where the business involved did not send the complainant a final response.  

The underlining reason for the pause is to provide those carrying out the diagnostic work to report back to the regulator, providing it with a better understanding of the circumstance of sales of motor finance agreements involving DCAs, as well as give the FCA time to consider these findings and understand what steps should be taken next.  

This review will see a “skilled person” produce a report on how a sample of firms carried out motor finance sales before the 2021 ban, including sales before the FCA took on the regulation of motor finance in April 2014. 

To do this, they’ll look back over time at a large sample of customer files to review the arrangements between lenders and brokers, and the information provided to consumers at the point of sale – including how commissions were disclosed.  

The regulator has said this will then help it to decide whether consumer complaints should continue, or if an alternative approach is needed to resolve this issue in an “orderly, consistent and efficient manner”.

What does it mean for you?  

Despite the pause being in place, DISP 1.4.1R – which requires firms to assess and investigate complaints “promptly and diligently” continues to be in force. It does also encourage firms to continue to progress DCA complaints by investigating and collecting evidence that could help with their eventual – even if it determines such complaints should be resolved through an alternative approach.  

However, the pause does not prevent firms that wish to respond to these complaints from sending final responses – although this would give the complainant the right to ask the Financial Ombudsman to consider their complaint.  

The rules do also require firms to tell complainants with DCA complaints about the pause, the time limits for dealing with their complaint and the reason why the time limits have been paused.  

They also require businesses to update currently published consumer-facing information about their complaint handling procedures – such as information on their websites, reflecting the changes to the complaint handling time limits.

Additionally, on receiving any complaint, a firm must send the complainant a prompt written acknowledgement – including an explanation of the pause and the time limits.

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