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FCA warns motor finance firms to prepare to pay out following discretionary commission review

  • City regulator issues statement about motor finance firms’ resources
  • FCA is reviewing now-banned discretionary commission arrangements
  • It says firms have been taking different approaches to prepare for impact
  • Some of them haven’t kept all the relevant data

Time 9:18 am, April 12, 2024

Motor finance firms are being warned by the City regulator to make sure they’ve got enough money to compensate people over the discretionary commission arrangements scandal.

It follows January’s launch of a Financial Conduct Authority review of historical use of motor finance discretionary commission arrangements (DCA) and sales across several firms.

The watchdog is investigating cases of motor finance firms not paying out compensation to customers over the now-banned commission arrangements.

The FCA said today it had seen that firms had been ‘taking different approaches to account for the potential impact of previous use of DCA on their financial resources’.

As a result, it would now be writing to lenders ‘to remind them they must maintain adequate financial resources at all times’.

It added: ‘While each firm will need to examine its own specific circumstances, we expect this would include planning for any additional operational costs from increased complaints and, where applicable, to meet the costs of resolving those complaints.’

The month after the review’s launch, Lloyds Banking Group, which owns motor finance firm Black Horse, was said to have put aside £450m for pay-outs over the scandal.

Last month, the FCA said some car finance firms were very probably guilty of hiding commissions on loans to customers.

Also in March, Close Brothers – one of the largest car finance providers – said it was shoring up its balance sheets by up to £400m in case of a heavy hit from the watchdog.

The Money Saving Expert website, run by Martin Lewis, said last month that more than 1m car buyers had now used its online system that lets customers register formal complaints with their lenders.

It’s been estimated by brokers at investment bank Jefferies that the bill for the finance sector could be as high as £13bn.

Today’s three-page letter from FCA director of consumer finance Roma Pearson outlines to motor finance firm CEOs what the FCA expects them to do with immediate effect.

It includes assessing how adequate their financial resources are, as well as ensuring financial statements are accurate plus making adequate disclosures.

The letter also tells them that the FCA will be monitoring their firm’s financial resources and may step in if it finds that things aren’t as they should be.

The FCA also said today that motor finance firms involved in its review had ‘engaged with us constructively’. But it added that many of them were ‘struggling to promptly provide the data we need’.

Among the reasons were data being stored on a number of systems and/or being spread between brokers and lenders. It had even found that in some older cases, firms hadn’t kept all relevant records.

It highlighted that Barclays had lodged an appeal against the Financial Ombudsman Service’s decision to uphold a complaint relating to DCA – which is what sparked the FCA’s probe.

‘We recognise this work has generated some uncertainty. We want to provide certainty to consumers and firms as soon as possible,’ it said.

‘However, that relies on receiving comprehensive data promptly from a range of firms, and potentially, the speed and outcome of any litigation.’

The next steps of the review will be set out by September 24 at the latest, with the FCA reserving the right to extend the review and the complaint pause.

John Bowman's avatar

John has been with Car Dealer since 2013 after spending 25 years in the newspaper industry as a reporter then a sub-editor/assistant chief sub-editor on regional and national titles. John is chief sub-editor in the editorial department, working on Car Dealer, as well as handling social media.

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