In January 2024, the Financial Conduct Authority (FCA) launched a review into historical motor finance discretionary commission arrangements (DCAs) which were banned in 2021 to determine whether there has been ‘widespread misconduct’.

In a significant development in October 2024, the Court of Appeal ruled in favour of consumers in relation to three motor finance commission claims, stating that DCAs were unlawful unless they had been disclosed to the consumer, and that they had given informed consent to the payment. While this ruling goes beyond the scope of the FCA’s review into historical use of DCAs by motor finance firms, it has raised further concerns for the sector and the possibility of widespread liability where commissions were not properly disclosed.

In response to the Court of Appeal’s ruling, the lenders involved appealed to the Supreme Court and these cases were heard over several days in early April. Given the potential impact of the outcome, the Supreme Court is expected to hand down a decision in an expedited timeframe.

The FCA also recently announced that it will confirm within six weeks of the Supreme Court handing down a decision whether they will be proposing a redress scheme and how it would be taken forward. The FCA has indicated that if, considering the Supreme Court’s decision, they conclude motor finance consumers have lost out from widespread failings by firms, then it is likely they will consult on an industry-wide redress scheme.

In the meantime, complaints relating to motor finance are expected to remain high, noting FCA rules mean motor finance firms have until after 4 December 2025 to respond to both DCA and non-DCA motor finance complaints.

While the decision of the Supreme Court and the FCA’s announcement are eagerly awaited, firms may be grappling with some of the following strategic and operational issues:

• The ongoing use of commission models and how this may impact broker engagement, deal flow and loan origination
• The impact of an increase in operational and compliance costs driven by complaint volumes, processing of data subject access requests (DSARs) and enhanced disclosure requirements
• The repercussions of any possible remediation exercise and likely challenges with the  implementation (e.g. data, resources, scope and  quantum of compensation)
• How can the firm remain competitive and retain market share?
• How can the firm manage ongoing liquidity and working capital requirements, including identifying cost efficiencies across the business?

The FCA has previously noted its concern about the financial impact of their review on firms. In a ‘Dear CEO’ letter sent in April 2024 to motor finance firms the regulator highlighted the importance of conserving cash and maintaining adequate financial resources in light of increased commission complaints, and the associated costs for handling and resolving those complaints.

In times of uncertainty, it is important that directors (and senior management) take a proactive and well-informed approach to governance.

Considering the FCA’s recent announcement about the likelihood of a redress scheme, and forthcoming Supreme Court decision, below are key actions that directors (and senior management) can take now:

• Assess the extent to which your firm has used brokers, together with their potential exposure to the recent ruling. Map the sales journey to understand if brokers are compliant with this new interpretation of common law
• Review and reconfirm your firms’ products and services are fully aligned with the Consumer Duty’s requirements to reduce the likelihood of future claims
• Identify your population of consumers whose agreements may have been subject to DCAs
• Triage and investigate complaints, and process DSAR requests proactively
• Ensure timely access to relevant financial and operational MI reporting
• Identify the operational requirements to undertake a remediation exercise, including the need for additional internal resource or third-party support
• Consider the format, quality, and availability of  data, including any reliance on legacy systems
• Undertake detailed scenario analysis, with cash flow and liquidity modelling, to understand the  potential level of claims arising from these matters  and what the business can withstand, both financially and operationally. This exercise may also highlight areas of potential stress or vulnerability and triggers that may lead to financial pressure
• Establish how any possible remediation exercise will be funded

Where a firm may be experiencing financial difficulties or have concerns about the impact on future performance, directors should engage with their advisors (both legal and financial) early to consider options available and how best to navigate the challenges.