This update from the FCA on motor finance deals is of interest to insurers, since it shows that offers perceived as being perfectly fair at one time, become grounds for consumer complaints in the future. In particular commissions paid to third parties may well be looked at in future. The key issue is that although complaints were initially rejected, the FCA has sided with consumers at a later date.
For brokers and legal panel partners especially, the future needs to be one of market transparency on any commissions paid, either at point of inception, or at the claims stage. Transparency is everything. Here’s the statement from the FCA;
In 2021, the FCA banned discretionary commission arrangements. This removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance. We asked firms to review their practices and, where harm was identified, to address this.
There have been a high number of complaints from customers to motor finance firms claiming compensation for commission arrangements prior to the ban.
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]. It found in favour of complainants in two recent decisions [see here and here]. This 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. So, there is significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.
Consequently, we are using our 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 8-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).
PAUSE AND REGROUP
We are introducing the pause without consultation from today. This is to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market while we assess the issue and determine the best way forward. In deciding next steps, we will be informed by our statutory objectives to protect consumers, ensure market integrity and promote competition in the interests of consumers.
It is particularly important to manage these risks because, in line with most types of consumer credit, motor finance is not protected by the Financial Services Compensation Scheme.
This pause will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.
For example, if a firm had been dealing with a complaint for 3 weeks at 11 January 2024, the time limit for responding to the complaint would be paused for 37 weeks until 25 September 2024. When the pause ends, the firm would have the remaining 5 weeks to provide its final response. If a complaint is received during the 37-week period, the 8-week deadline will expire on 20 November 2024.
The 37-week period will enable us to analyse the issues and decide what, if any, further action including legal steps are necessary. We may need to extend the pause if more time is required to make sure [complaints are dealt with properly and] consumers who might be owed compensation receive it.
Consumers will also have up to 15 months to refer their complaint to the Financial Ombudsman, rather than the usual 6 months. This extension applies to complaints where the firm had sent a final response in the period beginning with 12 July 2023 and ending with 10 January 2024, or where the firm sends a final response during the period beginning with 11 January 2024 and ending with 20 November 2024.
Consumers can find out more about how this affects them.
We plan to set out next steps on this issue in Q3 2024.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said:
“We are taking a closer look at historical discretionary commission arrangements in the motor finance market following a high number of complaints from customers, which are being rejected by firms.
“If we find widespread misconduct, we will act to make sure people are compensated in an orderly, consistent and efficient way.”
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