What’s happening in the motor finance market?

Commentary | 26/07/24

After a mortgage, the purchase of a vehicle is often the second largest expense within a household, which is why a range of motor finance options have developed over the years to assist families in making this purchase. The CCTA membership includes motor finance firms of different sizes with various specialisms across the sector.

With motor finance being such a large financial services sector, the Financial Conduct Authority (FCA) has carried out various pieces of work into the sector over the years.

In 2021, the FCA banned what are referred to as discretionary commission arrangements (DCAs). This removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance.

Moving forward to January this year, the FCA announced that they would be carrying out further work on the issue of DCAs. They confirmed that there had been a high number of complaints from customers (some driven by claims management companies) to motor finance firms claiming compensation for commission arrangements prior to the introduction of the ban.

The FCA believed that some firms were unfairly rejecting such complaints from consumers based on the applicable legal and/or regulatory requirements at the time of the transaction. This was also reflected in two Financial Ombudsman Service (FOS) decisions where the complaints had initially been rejected by firms but were overturned by the FOS upon investigation.

Recognising the potential large-scale impact of these developments, the FCA announced the following:

  • Use of the powers under s166 of the Financial Services and Markets Act (FSMA) to appoint a skilled person to review historical sales of motor finance agreements involving DCAs.
  • A temporary pause in the 8-week limit within which firms are required to provide a final response to complaints.
  • Extending the time limit for complainants to refer complaints about DCAs to the FOS after a final response.

As part of the skilled persons review many motor finance firms from across the sector were contacted and asked to share information with the regulator. This included asking firms for full, clear and transparent information in respect of their past DCAs which had to be supplied at pace.

Through this the FCA hopes to gain a thorough understanding of the different types of commission models within different businesses. The regulator is now analysing the information it has received. If it finds widespread misconduct it will act accordingly.

While the FCA carries out its investigation, there are also lots of relevant cases going through the courts which may have an impact on the FCA’s action. This includes a judicial review of the FOS, launched by Barclays which we understand the FOS will challenge.

The FCA plans to communicate a decision on next steps by the end of September but these court cases on likely to have an impact on proceedings which could see the FCA having to extend its review.

The CCTA regularly holds roundtable sessions for our motor finance members which cover issues such as the above. If you are interested in attending or being involved, please get in touch. Members will be kept updated on the FCA’s project.