Car finance is now under the FCA spotlight

The FCA has announced today that it will be completing a review of car finance to ensure that customers who may have suffered a loss because of poor practices are compensated.

Customers with car finance purchased before 28 January 2021 can now make a complaint direct to the Financial Ombudsman Service, with Temporary Complaint Handling Rules in place to accept and review complaints. The FCA is pausing the normal 8-week deadline for a firm to respond to a customer complaint involving discretionary commission on car finance. Firms will have until 25 September 2024 to process such complaints.

FCA to undertake work in the motor finance market | FCA

What is the issue?

Prior to January 2021, some car retailers and motor finance brokers received commission linked to the interest rate that customers pay – creating an incentive to sell more expensive credit to some customers.

An earlier FCA review had found:

• widespread use of commission models that link brokers’ commission to the interest rate charged to the customer
• a high incidence of firms not meeting required standards on the information they should disclose to customers

The Financial Ombudsman has received significant numbers of complaints about unfair sales practices and discretionary commission arrangements before the ban came into effect.

Who is eligible to complain?

The Financial Ombudsman website says this will apply to complaints where: 

• a consumer bought a car using car finance before 28 January 2021 
• the lender and car dealer (acting as credit broker) had a discretionary commission arrangement, and 
• the consumer: made a complaint to the car dealer (acting as credit broker) or lender between 17 November 2023 and 25 September 2024, or received a final response to their complaint from the business between 12 July 2023 and 20 November 2024. 

The temporary complaint-handling rules won’t apply to complaints relating to: 

• cars bought using car finance on or after 28 January 2021 
• cars purchased under a hire agreement, such as Personal Contract Hire 

What size is the car finance market?

Current estimates put the car finance market at £40bn in 2022, representative of around 80% of cars purchased. This shows significant growth since 2009 at £11.2bn, evenly split between new and used cars. Of course, not all car finance would have been sold on a discretionary commission basis or without the proper disclosures.

What happens next?

It is fair to assume Claims Management Companies will now gear up their marketing efforts, encouraging customers to complain. If we look at what happened with PPI, it is likely we can expect to see large numbers of complaints, a period of investigation, uphold or decline of complaints, appeals and compensation.

There will also be implications from the FCA’s announced review. This may take the form of a review of firms own complaint handling processes to ensure these are robust and the right outcomes have been achieved. Where the FCA finds firms have fallen short, remedial work could include reopening complaints and an overhaul of complaints handling processes.

One interesting question is the basis for the deadlines set out in the FCAs announcement.

How can BDO help?

If you are a motor finance firm who may be impacted by this recent FCA announcement we can help you prepare. We are already supporting motor finance firms to respond to FCA requirements, review their systems and controls, and to provision for additional complaints handling expertise and resources where that might be needed. Please get in touch today if you would like to explore your position.

Contact

Richard Barnwell BDO LLP

richard.barnwell@bdo.co.uk

Alison Barker BDO LLP

alison.barker@bdo.co.uk