MT spotlight on motor finance

The Financial Conduct Authority is looking at historical arrangements for motor finance commission while taking a separate look at the GAP insurance market.

In January, the Financial Conduct Authority (FCA) announced its investigation of historical cases of motor finance companies not paying out compensation to customers for discretionary commission arrangements.

In 2021, the FCA banned discretionary commission, removing the incentive for brokers to increase the interest rate that a customer pays for their motor finance. The FCA asked finance houses to review their practices and, where harm was identified, to address this.

But in January it said there have been a “high number” of complaints from customers to motor finance firms claiming compensation for commission arrangements prior to the ban.

It said firms are rejecting most complaints because they consider that they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements.

The Financial Ombudsman Service has considered some complaints rejected by firms and found in favour of complainants in two recent decisions involving Black Horse in April 2016 and Barclays in November 2018.

This, said the FCA, is likely to prompt a significant increase in complaints from consumers to firms and the Financial Ombudsman. Claims have also been brought in the County Courts, some of which have been upheld.

The FCA is using its powers under s166 of the Financial Services and Markets Act 2000, to review historical motor finance commission arrangements and sales across several firms.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way and, if necessary, resolve any contested legal issues of general importance.

“In the meantime, we are pausing the eight-week deadline for motor finance firms to provide a final response to relevant customer complaints.

“The pause will apply to complaints about motor finance agreements where there was a discretionary commission arrangement between the lender and the broker and will last for 37 weeks (approximately 9 months). We are introducing the pause without consultation from today.

This pause will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.

The FCA said the 37-week period – which could be extended – will enable it to analyse the issues and decide what, if any, further action including legal steps are necessary. Consumers will also have up to 15 months to refer their complaint to the Financial Ombudsman, rather than the usual six months.

There were reactions from both ends of the spectrum. Within a few weeks the number of complaints received about motor finance and commission payment is closing in on a million on the Martin Lewis MoneySavingExpert website. Lewis is recording on Twitter – now renamed X – the number of individuals that have downloaded his step-by-step guide for consumers to complain.

The guide included a free car finance reclaim tool so motorists could bypass professional claims companies that proliferated during the PPI era.

According to tax and consultancy firm RSM rotor finance, firms face coming under “huge operational pressure” with what it described as an anticipated deluge of complaints over historic motor finance commission payments.

Finance houses have reacted. Close Brothers scrapped its dividend for shareholders as it awaits the outcome of the FCA review. Its share price fell 16% on the day it announced the move.

In a statement it said: “There is significant uncertainty about the outcome of the FCA’s review, and the timing, scope, and quantum of any potential financial impact on the group cannot be reliably estimated at present.

“In accordance with the relevant accounting standards, the Board has concluded that it is currently not required or appropriate to recognise a provision in the group’s Half-Year 2024 results in relation to this matter.”

Lloyds Banking Group also acted, setting aside £450m for the potential impact of the review. It said the impact could be greater or lower depending on the scale and detail of the FCA findings in September.