The Financial Conduct Authority (FCA) has revealed plans to extend the time allowed for motor finance companies to address an anticipated surge in consumer complaints, following a recent Court of Appeal decision that declared it unlawful for banks to pay commissions to car dealers without customers’ informed consent.
The UK regulator warned that car finance providers are likely to see a significant influx of complaints over alleged mis-selling practices.
Proposals are set to be published within a fortnight; if carried forward, it would result in the complaint extension coming into force by mid-December.
Money saving expert Martin Lewis, shared on social media: "While not specified in its announcement, I've had it confirmed this applies to ALL car finance commission complaints, not just the Discretionary Commission Arrangements (DCAs) complaints previously covered.
"It signals that the FCA is paving the ground to in future broaden the scope of its car finance investigation, so not only at the 40% of past claims that had DCAs (where dealers could increase their commission by increasing interest) but all commissions including fixed commissions."
Lewis added that "almost everyone" could see money returned to them with this also including drivers who were previously rejected under the DCA complaints process.
On 25 October, the Court of Appeal found it illegal for dealerships to receive commissions on car finance deals without securing “fully informed consent” from buyers. This decision has generated comparisons to the payment protection insurance (PPI) scandal, which ultimately cost banks £50bn. Analysts warn that potential compensation costs for banks in this case could surpass £16bn, heightening concerns that the final financial impact may mirror that of PPI.
Until discretionary commission arrangements (DCAs) were banned in 2021, brokers and dealerships had the authority to set interest rates on car loans, incentivising higher charges to customers irrespective of factors like loan size, duration, or credit profile. RBC Capital Markets estimated that Close Brothers (CBG.L), which has since paused its car loan services, may face liabilities as high as £640m, exceeding its current market capitalisation.
The FCA said it would write to the Supreme Court “asking it to decide quickly whether it will give permission to appeal and, if it does, to consider it as soon as possible, given the potential impact of any judgment on the market and the consumers who rely on it”.
The regulator also hinted it may intervene in any Supreme Court proceedings to contribute expertise on consumer finance matters, and it recommended that car finance companies assess whether to allocate additional financial reserves to handle claims.
The regulator’s chief executive Nikhil Rathi and chair Ashley Alder are expected to address the challenges for car finance companies when they appear before the House of Lords financial regulation committee later on Wednesday.
The motor finance industry has faced upheaval since the FCA banned discretionary commissions in 2021, a practice that incentivised dealers to place customers on higher financing rates. This ban has led to a surge in consumer complaints, which are often escalated to the Financial Ombudsman Service through claims management companies.
The recent Court of Appeal judgment expanded the scope beyond discretionary commissions, ruling that other motor finance commission types, including fixed fees, are also unlawful without proper customer disclosure. The FCA’s extension aims to prevent “disorderly, inconsistent and inefficient outcomes” for consumers and motor finance firms.
Following consultations with 63 lenders and consumer representatives, the FCA revealed concerns over the availability of car financing. Several lenders have already scaled back operations amid potential liabilities and market uncertainty. The FCA will publish further details on the extension within two weeks, stating it will “cover at least the period until the Supreme Court decides whether to grant permission to appeal.”
Motor finance has been a profitable segment for UK carmakers, with credit financing accounting for 80% to 90% of new car purchases. Last year alone, £52bn in motor finance loans were issued by members of the Finance & Leasing Association.
However, finance companies now face the prospect of historical claims for commissions previously allowed under FCA rules. The regulator noted that “firms authorised by the FCA must meet wider legal requirements as well as regulatory rules. The interpretation of common law is rightly for the courts.”
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