Hitting the brakes: UK FCA review of motor finance commission arrangements

Key takeaways

• The FCA will use its powers under section 166 of the Financial Services and Markets Act 2000 to review historical motor finance commission arrangements and sales across several firms.
• There is a pause to the 8 week deadline for final responses to relevant customer complaints from 11 January 2024. The pause will last for 37 weeks.
• The pause will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.
• Consumers also have up to 15 months to complain to the FOS, depending on when they received their final response, rather than the usual 6 months.
• The FCA will set out next steps by 24 September 2024 at the latest. It has cautioned that if it determines firms owe redress to a large number of customers it may need to intervene, eg by setting up an industry-wide consumer redress scheme.

Read on for more on the FCA's announcement.

Why has the FCA decided to act?

On 11 January 2024, the FCA issued a press release announcing work it is undertaking in the motor finance market, along with policy statement (PS24/1).

Discretionary commission arrangements (DCAs) were banned by the FCA in 2021, which removed the incentive for brokers to increase the interest rates that customers paid. In the meantime, there have been a large number of complaints from customers in relation to DCAs before the ban was introduced. Firms are rejecting most complaints because they consider they have not acted unfairly or caused loss to their customers based on the relevant legal and regulatory requirements – but many consumers disagree with this decision. 

The Financial Ombudsman Service (FOS) has considered some complaints that have been rejected, and found in favour of complainants in two recent decisions (here and here). This makes it likely that there will be a significant increase in complaints from consumers to firms and the FOS. Claims have also been brought in the County Courts, with some being upheld.

That means there’s a significant dispute between some firms and customers on whether those firms have breached legal and regulatory requirements. As a result, the FCA has announced that it will use its powers under section 166 of the Financial Services and Markets Act 2000 (FSMA) to review historical motor finance commission arrangements and sales across several firms.

Pausing the 8 week deadline for final responses

From 11 January 2024, the FCA is pausing the 8 week deadline for motor finance firms to provide a final response to complaints about DCAs. This is to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market while the FCA assesses the issue and determines the best way forward. 

The pause is being introduced without consultation. It will last for 37 weeks (approximately 9 months), and will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024. For example, if a firm was dealing with a complaint for 3 weeks at 11 January 2024, the firm would have the remaining 5 weeks to provide its final response once the pause ends. The FCA might need to extend the pause if more time is required to make sure complaints are dealt with properly and consumers who might be owed compensation receive it.  

However, the FCA is encouraging firms to continue progressing complaints during the pause (where possible) by continuing to investigate and collect evidence to help with their eventual resolution. The new rules also include requirements on keeping complainants informed about changes to complaint handling timeframes.

Consumers also have up to 15 months to complain to the FOS if they received their final response between 12 July 2023 and 20 November 2024, rather than the usual 6 months.

Possible solutions

The FCA has cautioned that – if it determines firms owe redress to a large number of customers - it may decide that providing redress through consumer complaints doesn’t lead to the best outcomes for consumers or the effective functioning of the market. Instead, it may need to intervene with an alternative approach. For example:

• using powers under section 404 FSMA to set up an industry-wide consumer redress scheme; or
• applying to the Financial Markets Test Case Scheme, to help resolve any contested legal issues of general importance.

Next steps

Affected firms must make sure that they comply with all the rules in Appendix 1 of the policy statement that are relevant to their business.  

The FCA welcomes feedback on the impact of the rules and their approach to the provision of redress for harm caused by DCAs more generally. Feedback can be sent to [email protected] up to and including 11 March 2024.

The FCA plans to set out its next steps by 24 September 2024 at the latest. This includes whether the FCA needs to extend the pause or make other changes.

If you would like to discuss any aspect of the FCA's announcement and policy statement, please get in touch with any of the people listed above or your usual Hogan Lovells contact.

Authored by James Black, Jen Staniforth and Virginia Montgomery.