Discretionary Commission Arrangements: Key Preparations
What’s Happening With DCA’s in 2024?
Motor Finance compliance developments rarely make the mainstream press. When they do – you know something big is going on. What’s happening with the FCA and Discretionary Commission Arrangements in 2024? Are we about to see the biggest complaints landscape upheaval since PPI? Here’s everything you need to know.
January 11th, 2024 – The FCA Statement
On the second Thursday of the year, the FCA released a statement titled “FCA to undertake work in the motor finance market”. The statement begins by summarising the 2021 ban on discretionary commission arrangements, removing an incentive for brokers to raise the interest rate a customer would pay on their car finance. The regulator noted that subsequently there had been a large quantity of complaints from customers who believed they had received commission-motivated higher interest rates before the ban.
The majority of these complaints have been rejected by motor finance firms who do not believe they have acted unfairly – but the Financial Ombudsman Service has reviewed some of these complaints and found in favour of the customer. They expect this to lead to a rise in the volume of these complaints.
In reaction to all of this, the FCA announced in their statement that they would be conducting a review of “historical motor finance commission arrangements and sales across several firms.”
What’s Happening Now?
The FCA review will look to establish if there has been “widespread” misconduct causing detriment to consumers. If that’s the case, the next move will be to decide how these complainants can receive “appropriate settlement[s] in an orderly, consistent and efficient way”. One immediate effect of this is that the regular 8-week deadline for resolving motor finance complaints has been paused for 37 weeks – specifically in cases where “there was a discretionary commission arrangement between the lender and the broker”.
The pause is backdated to apply to complaints received on or after November 17th of 2023, and will apply to complaints received up to and including the 25th of September 2024. On the customer side, the 6-month period to refer complaints to the Financial Ombudsman Service is being temporarily extended to 15 months.
What Happens Next?
The FCA statement includes the intention to announce next steps in the third quarter of 2024.
At present we can only speculate about what those next steps will be. How the regulator response plays out will depend entirely on what the review finds – how widespread discretionary commission arrangements were and how severely they were impacting consumers. It’s possible that this will then become a PPI style high-profile mini-industry within the complaints world, requiring significant investment from motor finance organisations both in terms of compensation and complaints resource. Given press coverage, regardless of their decision, it is near certain that we will see an increase in complaints as more consumers become aware of the situation and the possibility they will have been affected.
Another factor to consider when predicting how this will play out is the Financial Ombudsman Service’s plans for the year. Their annual plan consultation opened in December includes the possibility of them beginning to charge “professional representatives” – introducing a cost to CMCs bringing claims against Financial Services firms. That consultation closes on January 30th with the Ombudsman’s finalised plan and budget for the year set to be published on March 31st. Depending on what they decide and how large the fees are, that could seriously disincentivise large scale CMC activity on this issue regardless of the FCA decision.
What Should Motor Finance Businesses Do?
Motor Finance firms should be considering all of your current capabilities that could be effected – we could be dealing with complaints dating back as far as April 2007, think about how far back you might need to go and what data you can utilise. What do your current processes relating to DCA’s look like? What do you have in place for customers in scope? How will you defend CMC activity? What forecasts do you have in place in terms of budgeting for redress?
The FCA’s “Temporary changes to handling rules for motor finance complaints” webinar today made it clear that the regulator expect firms to continue resolving all the complaints that they can and that the current extended timelines shouldn’t be treated as a total freeze – once the pause ends, complaints will be picked up at the point they were frozen so, for example, a complaint that had been with the firm for 3 weeks when the pause came into effect will need to be resolved within 3 weeks after September 25th. Right now, we would recommend motor finance firms continue responding to complaints wherever possible and start to plan ahead, carefully considering their complaints capacity.
There are some key factors to think about in terms of Complaints planning specifically. In situations where an organisation does not still hold all of the documentation relating to a complaint and the firm will be expected to conduct a full investigation and gather whatever documentation they can, examining what documentation they can retrieve from the customer and from the lender or any other parties involved.
There are also no plans at present to release any fixed templates how complaint responses. All of which paints a picture of a very involved, investigative complaints process, requiring trained, experienced and knowledgeable complaints professionals – and, depending on the FCA decisions we see later in the year, possibly a large number of them.
Kind Consultancy is currently supporting a number of Motor Finance firms in relation to DCAs, from ringfenced project teams to flexible complaints resource. For a confidential discussion about how we may able to assist your organisation, get in touch on 01216432100 or via selena@kindconsultancy.com – or you can find out more about our Kind Agile Solutions contract resource offering here
