It would certainly be safe to say that the Financial Conduct Authority (FCA) has decided to enter 2024 with a bang – publishing policy statement PS24/1 (the Policy Statement) setting out temporary changes to the rules for handling complaints relating to discretionary commission arrangements (DCAs) in the motor finance industry on the 11 January.
Although relatively benign in themselves, these changes are a direct response to the increasing volume of complaints regarding DCAs which have been referred on to the Financial Ombudsman Service (FOS) (and in some cases, to the Courts) having been rejected by the motor finance firms concerned. The Policy Statement also provides an insight into how the FCA intends to handle what is almost certainly a significant industrywide issue.
What are DCAs?
DCAs were arrangements that allowed brokers (usually the motor dealers) to increase the interest rate a customer would pay for motor finance to a rate higher than the lender was prepared to lend at. The upshot was that it allowed brokers (with the knowledge of the lenders) to increase the commission they would get from a loan by setting higher rates of interest, yet there was no regulatory requirement on them to tell the borrower they had done this.
The FCA started a review of the sector in 2017 and issued its final report in 2019. It then imposed a ban on DCAs in the motor finance industry from January 2021. It did this by making changes to its the Consumer Credit Sourcebook (CONC) within its Handbook of Rules and Guidance (mainly CONC 4.5).
It also took the opportunity to update disclosure requirements relating to broker commissions in the wider consumer credit market, many of which had not, up to then, been disclosed to borrowers, or required to be disclosed. The ban has precipitated an ever increasing volume of consumer complaints in relation to historic DCAs, the vast majority of which have been rejected by lenders and then referred by the complainant to the FOS for adjudication.
What are the complaints about?
In 2023, the FOS found in favour of two claimants who alleged they had been left out of pocket as a result of DCAs entered into with Clydesdale Financial Services Limited (trading as Barclays Partner Finance) and Black Horse Limited (part of the Lloyds Banking Group). In each case, the FOS ruled that borrowers were due compensation equating to the amount of interest they had paid which could be attributed to the applicable DCA (that is, effectively, any interest exceeding the interest reasonably payable for the loan) because:
- The DCA operated to create "an inherent conflict between the interests" of the borrower and the lender
- In operating the DCA, each lender breached guidance at CONC 4.5.2G (which states that commission rates may vary only to reflect additional work undertaken by the broker who is receiving the commission, and
- That a Court would be likely to find that the relationship between the borrowers and each of the lenders was unfair for the purposes of section 140A of the Consumer Credit Act (CCA) for a number of reasons.
Why is FCA so concerned?
In issuing the Policy Statement, the FCA has acknowledged the potential scale of complaints arising from the historic use of DCAs in the motor finance industry (and the impact that the publication of these first FOS decisions are likely to have on consumer awareness of the issue).
It has taken action now to try to avoid inconsistent and divergent outcomes and to reduce the risk of a disorderly market. It has decided to pause, for a period of 37 weeks, the normal standard requirement on regulated firms to provide a final response to a DCA complaint within 8 weeks of receiving it, and the corresponding right that borrowers bringing complaints have to refer their complaint for consideration by the FOS.
It has also extended borrowers' rights to refer complaints relating to DCAs to the FOS from six to 15 months where the lender sent its final response to the DCA complaint within the period set out in the rules.
In the Policy Statement, the FCA explains clearly that it has taken these actions in order to provide time for it to conduct diagnostic work using its powers under section 166 of the Financial Services and Markets Act 2000 (FSMA) to appoint a skilled person to produce a report assessing the impact and scale of the use of DCAs and consider whether the current approach being taken to complaints relating to them by the industry is justified. The FCA has indicated that it is particularly concerned that, due to the potentially widespread nature of the complaints, the approach to their resolution should be timely, orderly and consistent.
In response to this report, the FCA then plans to say what steps it intends to take next by 24 September 2024 at the latest.
A consumer redress scheme?
A potentially ominous sign for lenders and brokers in the motor finance industry is the FCA's reference in the Policy Statement to its powers under s.404 of FSMA to establish an industrywide consumer redress scheme (a step it chose not to take in respect of PPI mis-selling a decade ago but has taken twice since then).
Although the amount due in compensation to each borrower (assuming that the FCA takes the same approach as the FOS and determines that this should be only the amount of interest directly attributable to a DCA) is likely to be relatively small, the sheer ubiquity of the use of DCAs in the motor finance industry and the size of the industry itself is likely to result in a significant sum in overall compensation, not to mention the human and financial resources firms will need to commit to the compensation assessment exercise.