Discretionary commission arrangements (DCAs) are agreements between lenders and brokers that grant brokers the ability to adjust the interest rates offered to customers. The FCA banned them in 2021, removing the incentive for brokers to charge customers a higher interest rate for their motor finance. In spite of this, motor finance providers have experienced a continued rise in the number of complaints from customers about DCAs in place prior to the ban and recent Financial Ombudsman Service (FOS) decisions have found in favour of complainants.
In its announcement on 11 January 2024, the FCA noted that there have been a high number of compensation claims related to such arrangements. The FOS has considered some of these complaints and has issued its first two decisions (see here and here), both ruling in favour of the complainant.
In anticipation of a significant increase in customer complaints to firms and the FOS, the FCA has intervened by using its s166 powers to appoint a skilled person to review historical sales of motor finance agreements involving DCAs. Initially, we understand that this review will cover approximately 10 motor finance providers.
The designated skilled person will support the FCA with its diagnostic work by assessing practices within individual firms resulting from the potential incentives created by DCAs and how those practices impacted customers. Should the FCA discover that there has been widespread misconduct and that consumers have lost out, it will determine the most appropriate approach to ensure that those who are owed compensation receive an appropriate settlement. This could involve an industry-wide consumer redress scheme under section 404 of the Financial Services and Markets Act. The FCA aims to communicate a decision on next steps by the end of September 2024.
The FCA has also issued PS24/1, which are new temporary complaint handling rules for complaints about motor finance agreements involving a DCA. The rules, which are effective immediately, pause the 8-week deadline for motor finance firms to provide a final response to relevant customer complaints. The rules pause this requirement for a period of 37 weeks (approximately nine months), which will enable the FCA to complete its diagnostic work and decide what, if any, further action is necessary. The pause will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.
The rules also extend the amount of time consumers have to refer complaints about DCAs to the FOS. Consumers will have up to 15 months to refer their complaint to the FOS, rather than the usual 6 months. This extension applies where the firm sends its final response to the complaint between 12 July 2023 and 20 November 2024.
Firms must ensure that they comply with the new rules set out in DISP that apply to their business. This includes updating the information they currently publish for consumers on their internal complaints handling procedures, including information on their websites, as well as informing complainants about the changes to time limits for complaint handling and FOS referrals.
Although the FCA has paused the complaints time limit, it's encouraging firms to continue progressing complaints about DCAs where possible, by continuing to investigate and collect evidence to help with their eventual resolution.
The FCA is contacting the lenders involved in its skilled person review directly. However, all firms operating in the motor finance industry, including those not initially within the scope of the review, should have plans and resources in place to enable them to respond effectively to any further complaints or direct regulatory interventions.
The latest developments on DCAs continues a period of heightened regulatory scrutiny in the sector. Many lenders have been undertaking reviews and remediation exercises under close FCA supervision, including through the use of its s166 powers, in relation to their handling of customers in financial difficulty in the aftermath of the COVID pandemic and through the cost of living crisis.
Another area of interest for the FCA is GAP insurance and the value that this is providing customers. In September 2023, it wrote to insurers stating that they must take immediate steps to prove that customers are getting a fair deal in light of analysis that only 6% of the amount paid in premiums by customers is paid out in claims, while 70% of the value of insurance premiums is paid out in commissions to parties in the distribution chain such a motor dealers.
