Motor finance firms must account for customer complaints redress under Consumer Duty

As the 31 July Consumer Duty reporting deadline looms, RSM UK is urging motor finance firms to allocate and document adequate financial provision for potential customer complaints redress in conjunction with new reporting rules. 

Historically, some retailers and motor finance brokers received commission linked to the interest rate paid by customers. This was known as a discretionary commission arrangement, or DCA. These arrangements created a potential incentive for brokers to sell credit at a higher cost, so in 2021 the Financial Conduct Authority (FCA) banned DCAs, saving consumers an estimated £165m a year.

In January, the FCA announced it was reviewing historic car finance arrangements, and would take regulatory action if widespread misconduct means consumers have lost out. The FCA has paused final responses to customer complaints relating to DCAs until September 2024, when the outcome of FCA review will be announced. Analysts have estimated this could result in £16bn of customer redress for the motor finance industry. 

In April 2024 the FCA wrote to firms in the motor finance sector reminding them they ‘must maintain adequate financial resources at all times.’ In line with the annual reporting requirements under the Consumer Duty, firms are expected to critically assess their customer service performance and anticipated increased customer contact.

Zoe Morton, associate director at RSM UK, said: ‘The July 31st deadline for historic products and services to meet the Consumer Duty requirements means firms must ensure their resource capacity can meet this increased demand. Reporting should reflect provision for the high likelihood of customer redress, along with any potential shortcomings and action needed. As many consumers were unaware that brokers were allowed to set varying rates of commission, it’s likely the past approach to DCAs fails to meet Consumer Duty requirements.’ 

Steps motor finance firms should be taking:

• Ensure financial and administrative provision for potential customer redress is clearly documented in board reporting, to ensure good outcomes for customers, in line with the new Consumer Duty rules.
• Ensure complaints handling procedures continue to reflect the latest developments from the FCA, including information on websites or in literature. 
• Firms that did not offer DCA should still plan for the operational impact of dealing with any complaints they may receive. The impact of dealing with these could still be sizable.
• To meet the requirements of the FCA Consumer Duty ensure any findings communicated by the regulator are addressed, so lessons are learned.
• Continue to investigate any complaints received involving a DCA. Be prepared for a lifting of the pause from the FCA, to ensure you can resume dealing with complaints. 
• Consider the Information Commissioner’s Office (ICO) guidance on responding to data subject access requests. The Regulator expects a firm to respond to a consumer regardless of whether their agreement involved a DCA, even if they haven’t submitted a formal data subject access request. 
• Notify the FCA if litigation relating to motor finance commissions is subject to, or likely to be subject to, an appeal to the High Court or Court of Appeal.

Zoe Morton concludes: ‘The potential impact of the FCA’s review into discretionary commission arrangements is vast, much like Payment Protection Insurance (PPI) was. While motor finance providers and consumers are effectively in limbo until September, companies are still likely to receive an influx of complaints, which places them under huge operational pressure.’