The Financial Conduct Authority (FCA) announced on Tuesday 30 July 2024 that it would delay setting out the next steps in its investigation into Discretionary Commission Arrangements (DCAs) used in motor finance.
The original date of 24 September 2024 has been pushed back to May 2025.
While the extension makes the problem less urgent for car finance firms, the FCA also suggests that it is increasingly likely to introduce a redress scheme.
How we got here
The FCA originally banned discretionary commission arrangements in 2021. It found that the practice had led to higher costs for consumers, and made changes to ensure that consumers were better informed in the future.
A few motor finance customers took their complaints to the Financial Ombudsman Service (FOS) or the County Courts. When the FOS and County Courts upheld the customers’ complaints, the FCA decided it needed to investigate further.
Unexpected problems
As the investigation has progressed, it has been delayed by two unexpected factors.
First, Barclays asked for a judicial review of the Financial Ombudsman’s decision. The County Court judgements have also been appealed. The FCA will need to take the results of these legal proceedings into account. Alone, this was always likely to delay the investigation by several months.
However, a second problem emerged: firms have found it hard to access all the data that the FCA needed to conduct its investigation.
The FCA now expects it will need an additional eight months to set out next steps for the industry. In the meantime, the normal complaints process is paused, with an industry-wide backlog of more than a million complaints.
When the FCA does make its announcement, firms will need to work hard to clear the complaints. The FCA thinks that car finance firms will need at least another six months, until December 2025, before they’re in a position to give their final responses to customers’ DCA claims.
The data gap
The challenge that firms have faced in getting hold of the necessary data is significant. x
The FCA has investigated a sample of data from a number of firms spanning 14 years. It has found that firms have not always kept older data, that data has been stored on multiple systems, and that some of the data is in the hands of brokers (usually car dealers).
If the FCA decides to introduce an ‘alternative way of dealing with complaints’, such as a consumer redress scheme, firms are likely to face a significant challenge in tracking down customer data.
Is a redress scheme coming?
While it is too early to say what the FCA will decide, in the detail of its statement, the FCA says that what it has seen so far means it thinks a redress scheme is more likely than when it started its review. Despite some bullish noises from the industry, this is a significant hint about what to expect.
The extended timeline gives claims management companies more time to sign up consumers. That would make the complaints landscape potentially harder for car finance companies to deal with, both in terms of efficiency and consumer trust.
What next?
The proposed extension takes away some of the time pressure. But the announcement also suggests that the next steps will be complex. The firms that come out of this best will be those that use the time well.
The secret will be doing just enough preparation - not too much, nor too little.
Given the FCA’s hints about putting a redress scheme in place, firms should look again at their assessment of risk and their planned responses.
The data challenge is significant, and again, firms should assess how they might handle it, including talking to brokers about their plans.
And finally, firms should pay attention to the messages that brokers and consumers are hearing and prepare clear, simple communication for consumers.
Our webinar, ‘Motor Finance Claims: Navigating the Road Ahead’ helps organisations understand their position and adapt their strategy to comply with regulations whilst minimising impact on business as usual, and maintaining customer trust.
Watch the motor finance claims webinar here.