Background
Whilst conducting this review, the FCA has temporarily paused the 8-week time limit complaint response time from 11 January to 25 September 2024 and prolonged the FOS referral period from 6 to 15 months.
As part of a series on this topic, we explore the FCA's latest statement regarding motor finances firms' financial resources and the current progress of their review. We also consider how the industry is reacting to these changes and the FCA's investigation, focussing on consumers, claims management companies (CMCs) and finance providers. For further details of the specific changes applying to relevant firms, please read our article Navigating the Changes in the Motor Finance Industry | DWF Group.
The FCA's latest statement
On 12 April, the FCA issued a Dear CEO letter and a statement, reminding firms that they must maintain adequate financial resources at all times, explicitly stating that an assessment of whether those resources are adequate is undertaken. Tied to this, the FCA has set the expectation that each firm will be planning for additional operational costs as a result of the handling of increased complaints and, where applicable, the cost of resolving these complaints.
The FCA also reminded firms that it will use its ongoing supervisory and reporting processes to monitor financial resources and adequacy assessments, supplemented by additional data requests. Naturally it will take action where it finds those assessments have not been undertaken or firms are at risk of having inadequate resources. It is also on the lookout for any activity actions that suggest firms are attempting to avoid future liabilities.
This follows on from the FCA Chief Executive, Nikhil Rathi's speech last month where he stated in his view "it is improbable we will find nothing to report as we look at historic motor finance sales". It therefore appears the FCA are looking to ensure firms are financially capable of providing redress to impacted customers ahead of publishing their findings.
The FCA has also set out that whilst their review continues, firms should be continue to:
- Continue to investigate the complaints they receive involving a discretionary commission arrangement to enable them to act promptly to resolve complaints in the event that the pause is lifted and complaint handling should resume.
- Consider the Information Commissioner’s Office guidance on responding appropriately to data subject access requests, advising that firms should confirm, if a consumer asks, whether their agreement involved a discretionary commission arrangements, regardless of if they have submitted a data subject access request.
- Notify the FCA if they are involved in litigation relating to motor finance commissions that are subject to, or likely to be subject to appeal to the High Court or Court of Appeal.
In addition to these points, the FCA provided a brief update on the progress of their review, stating that many firms are struggling to promptly provide the data required for the review. They have outlined that the reason for this include data being stored on multiple systems, data being spread between lenders and brokers and, in the case of some older cases, firms having not retained all relevant records.
As we touch on below, this is in the context of the news that Barclays has started judicial review proceedings against one of the decisions made by the FOS, as mentioned previously.
How is the industry reacting to the FCA's review?
Consumers
Since the FCA's announcement, we have seen consumers taking notice of the potential overpayments which may have been made and the possibility of their entitlement to redress. This can in large part be attributed to the work of consumer champion Martin Lewis, who discussed the ongoing investigation on episodes of his television programme, where he also encouraged consumers to get their complaints in immediately and highlighted the launch of a 'free reclaim and tool guide' which includes template complaint letters. As a result, we have seen a significant influx of consumers using these letters to make complaints to finance companies.
Whilst consumer campaigners can be helpful at keeping consumers informed of their rights and getting the regulator's messages out to consumers in a way more digestible way, the message can often become so diluted and over-simplified that it causes the industry problems. For example, advising all consumers who have been provided finance to make a complaint misses the nuances of the FCA's review, such as the review only relating to DCAs, and causes delays in responses as finance providers become inundated with complaints.
In practice, we hear from the industry that there are significant numbers of customers raising complaints, including Data Subject Access Requests (DSARs), even where they never offered DCA arrangements.
Claims Management Companies (CMCs)
CMCs also appear to be looking to capitalise on the FCA's review and any potential redress scheme which may result from their findings. These companies typically operate on a no win no fee basis, instead taking a percentage of any compensation offered in the event that the claim succeeds.
We have seen CMCs begin to ramp up employment, and reinforce their funding arrangements, as they prepare to target finance companies, with finance companies themselves informing us that they are now receiving multiple complaints a day from CMCs in relation to motor finance. The expectation is that CMCs will now target consumers in similar way to how they did for the payment protection Insurance (PPI) scandal. We have already seen an increase in the number of complaints and legal claims issued against finance providers, as they look to target them on multiple fronts.
Finance Companies
As referenced above, finance companies are now receiving an avalanche of correspondence, complaints and legal claims related to any form of motor finance that has been provided, even if there was no DCA.
Whilst the FCA has paused the complaint response time, as detailed above, firms are still expected to have a process in place to address complaints in the interim and many firms therefore are struggling to handle this influx.
As noted in the recent FCA letter, firms are still expected to record complaints in the usual way and will have to ensure complaints are being categorised correctly to ensure they do not fall foul of the complaint handling rules in cases where the complaint is not regarding discretionary commission. In addition, firms need to ensure customers are informed and provided with helpful, accessible and timely support. From a regulatory perspective, the FCA are also expecting finance companies to be preparing management information around the finance provided and organising documentation relating to credit agreements, whilst also considering the financial implications required should redress need to be offered.
As a result of these increasing pressures on finance firms, we are seeing a need for them to allocate more resource to these areas of the business as current teams become overwhelmed. Some firms are looking to hire more staff whereas as others have looked to external consultants and outsourcing, in light of this being a limited time issue.
As noted above, we have also seen firms pushing back against the FOS decisions, with Barclays commencing judicial review proceedings of the FOS's decision to uphold a complaint relating to discretionary commission arrangements.
Conclusion
The FCA's decision to investigate historical discretionary commission arrangements has created a predictable snowball effect within the industry. Consumers are now taking an interest in the potential compensation they could gain depending on the outcome of the FCA's review and the efforts made by consumer champions and CMCs is only helping to fan those flames. As a result, finance providers are seeing a huge rise in complaints and legal claims, both connected and unconnected to the specific discretionary commissions arrangements which are being assessed, as consumers look to ensure they do not miss out. Finance firms will now have to find a way to navigate these mounting pressures, which look only set to increase as the FCA's review continues.
