On 11 January 2024 the Financial Conduct Authority (“FCA”) published policy statement PS24/1 (without consultation). The policy statement sets out temporary changes to the complaints handling rules for motor finance complaints, amid a rise in complaints against motor finance firms relating to commission.

By introducing this change, the FCA hopes to ensure that any redress that is due to customers leads to the right outcomes for consumers and the effective functioning of the motor finance market.

Background to the changes

The FCA has noted that motor finance firms have been 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 FCA referred to two complaints relating to a discretionary commission arrangement in their announcement, which were complaints rejected by firms and then referred to the Financial Ombudsman Service (“FOS”) and subsequently upheld. The decisions can be seen here and here.

It is expected that this announcement from the FCA will prompt an increase in complaints from consumers both to firms and to the FOS. The FCA commented that there is significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements, with some matters being escalated to the County Court.

What does the rule change mean?

The rule changes introduce:

1. A pause to 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) provided that the complaint was received by firms on or after 17 November 2023 and on or before 25 September 2024.
2. A 9-month extension for consumers referring their complaint to the FOS. This means consumers will have 15 months to refer their complaint to the FOS, 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.

What else is the FCA doing?

Alongside this rule change, the FCA is using its powers under Section 166 of the Financial Services and Markets Act 2000 to urgently assess whether the historic use of discretionary commission arrangements means a significant number of consumers could be due redress from motor finance firms because they paid too much for their motor finance.

Section 166 allows the FCA to appoint a skilled person to prepare a report on any issue relevant to the FCA’s statutory functions. The relevant firm under investigation is required to provide all reasonable assistance to the skilled person, including providing any information that the skilled person considers necessary or desirable to carry out their task. This could include copied of customer files, customer complaints and internal policy documentation.

The skilled person will produce a report on how a sample of firms carried out motor finance sales before the ban in 2021. This will include sales before the FCA took on the regulation of motor finance and other consumer credit firms in April 2014. It will involve the skilled person looking back over time at a large sample of customer files to review the arrangements between lenders and brokers, and the information provided to consumers at the point of sale, including how commission was disclosed. If the FCA finds evidence of widespread misconduct, it will likely introduce an alternative approach to resolve this issue in an orderly, consistent and efficient manner, rather than simply allowing complaints to continue.

Next steps

We are aware that several firms received “Dear CEO Letters” at the same time as the FCA’s announcement on the 11 January 2024. The FCA encourages firms to continue to progress complaints relating to discretionary commission arrangements, where possible during this period, by continuing to investigate and collect evidence to help with their eventual resolution. Even if the FCA determines that such complaints should ultimately be resolved through an alternative approach, it is highly likely that firms will need to take similar steps under that approach, so if firms can get ahead now, using the two FOS decisions as a guide to the FCA’s approach, that would be desirable.

The FCA plans to communicate a decision on next steps at the very latest by 24 September 2024, which is the date before the pause to complaint handling time limits is due to end. This would include whether the FCA consult on extending the pause or make other changes.

The FCA is welcome to feedback from key stakeholders on the impact of the rules and its approach to the provision of redress for harm caused by discretionary commission arrangements more generally. Feedback can be sent to [email protected] up to and including 11 March 2024.

In response to the FCA’s announcement, Stephen Haddrill, Director General of the Finance & Leasing Association said: “We welcome today’s announcement as the pause will ultimately provide certainty for firms and customers after a period where speculative and unfounded complaints issued by Claims Management Companies have congested what should be a smooth, prompt and clear process. We will work with the FCA over the coming months to resolve this issue.”

Commenting on the announcement, Wayne Gibbard, Partner and co-head of Financial Services Sector at Shoosmiths LLP said:

“The announcement from the FCA today is likely to be welcomed by many firms, who continue to grapple with spurious claims from CMCs. This is now to be balanced against the continued uncertainty of the FCA’s review of the sector through the use of s.166 and other activity. It has taken some time to get to this point, which has not helped firms or consumers in managing these issues, but it does at least now provide a pause on some of the operational stress. As we have seen, motor finance remains a hot topic for the FCA and is clearly on the radar again in 2024. If you are a motor finance lender or broker, we encourage you to get in touch with our team to discuss how this announcement will impact your business.”