FCA Announces Work in the Motor Finance Market
January 18, 2024
The regulator has initiated a comprehensive review of historical motor finance commission arrangements to identify potential widespread misconduct and consumer losses.
The FCA probes possible motor finance misconduct.
The UK’s Financial Conduct Authority (“FCA”) is investigating the motor finance industry following numerous consumer complaints about commission arrangements. Although a 2021 ban stopped brokers from incentivising higher interest rates for motor finance, customers have been seeking compensation for unfair commissions agreed upon before the ban. Motor finance firms, however, are largely dismissing these complaints, citing adherence to the legal and regulatory standards of the time.
To address these issues, the FCA is utilising its powers under section 166 of the Financial Services and Markets Act 2000 to examine past sales and agreements across various firms.
The FCA has also suspended the usual eight-week deadline for these companies to respond to customer complaints, extending the period for consumers to refer their complaints to the Financial Ombudsman Service (“FOS”) from six months to 15 months.
More than 10,000 individuals have expressed concerns about being overcharged, as noted by FOS chief executive Abby Thomas. The FOS has resolved two cases, finding the commission arrangements between lenders and car dealers unfair. These resolutions may set a precedent for addressing numerous similar complaints pending between consumers and firms.
Has the Motor Finance Industry Had Its Head in the Sand?
Is the motor finance industry facing a crisis akin to the PPI scandal? This question has been looming since the FCA initiated a review and published a report in March 2019 scrutinising the motor finance sector. The review brought several critical issues to light, including:
Commission models: Unfair practices in how motor finance is sold, particularly concerning interest rates set by brokers, which can often be biased and not in the best interest of the customer.
Transparency and information: A lack of clear and comprehensive information for customers, such as insufficient details about charges, interest costs and the commissions brokers receive, which can mislead customers.
Inadequate oversight: A significant gap in how lenders oversee and control broker activities, leading to potential misconduct.
Affordability assessments: Criticism for not conducting thorough affordability checks, which is crucial for responsible lending practices.
This reflects a broader issue in the financial services industry, where sectors beyond banking, such as motor finance, need to enhance their governance and customer protection measures to prevent potential mis-selling scandals and maintain consumer trust.
The FCA expects the embedding of Consumer Duty to be a key driver to improve customer protection.
FCA Outlines Its Expectations for the Industry
The FCA has outlined expectations for motor finance providers focusing on ensuring that firms adapt to market changes, maintain fair and transparent practices, and prioritise consumer interests and understanding, particularly in light of the industry's digital transformation and the shift towards more sustainable vehicle options.
Affordability: The complexity of motor finance products often leads consumers to focus on short-term costs rather than the total amount, potentially hindering their ability to compare products. Firms are reminded of their obligation to avoid causing foreseeable harm under the Consumer Duty.
Transition to AFVs: The shift away from petrol and diesel cars requires finance providers to evolve their product offerings. Due attention should be paid to product design, such as financing for charging points and ensuring that consumers understand the complexities of bundled products.
Commission models: Firms must comply with the ban on discretionary commission models and amendments to commission disclosure rules. They should ensure fair value in lending products, including reasonable fees for exceeding mileage limits or early termination of Personal Contract Hire agreements.
Broker / dealer oversight: Adequate oversight of broker and dealer networks is crucial. As sales shift from in-person to digital, firms need to adapt their oversight models to ensure compliance and correct information dissemination.
Culture and governance: The FCA expects firms to prioritise a healthy culture and governance, aligning policies and decision-making with consumer interests. Boards and senior management should embed this culture, ensuring accountability and good consumer outcomes.
Next Steps for Motor Finance Providers
In light of increased scrutiny, motor finance lenders must re-evaluate their compliance with FCA rules, particularly with the implementation of the Consumer Duty. This process is ongoing, requiring continual enhancement of their approaches. Understanding and clarifying roles within the distribution chain (as manufacturers, co-manufacturers or distributors) is crucial for coordinating activities to fulfil responsibilities under the Consumer Duty.
How We Can Help
Our financial services professionals support firms across the industry in reviewing and enhancing their governance, risk and compliance measures, including with respect to the Consumer Duty.
More information about FTI Consulting’s EMEA Financial Services practice can be found here: www.fticonsulting.com/uk/industries/financial-services
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