What does the temporary complaint handling extension mean for the motor finance industry?

On 30th July 2024, the FCA (the Regulator) issued an update extending its temporary complaint handling rules for discretionary commission arrangement (DCA) complaints in the motor finance industry. The Regulator is proposing to extend the current complaint handling pause it originally imposed on 11th January 2024 to now end on the 4th December 2025. This is to allow ample time for the FCA to collect and review the data from its initial review.  

As part of this pause, the FCA intends to set out the next steps in its review of past use of DCAs in May 2025. By then, the FCA expects to have analysed the data collected from firms and assessed the outcome of the Barclays judicial review of the Financial Ombudsman’s decision to uphold a DCA complaint. As a result of this, the next steps could involve consulting on a redress scheme.

Background

On 11th January 2024, the FCA announced its original review into whether motor finance customers had been overcharged due to the past use of DCAs, detected following an increase in complaints.

When this review was confirmed, the FCA paused the eight week deadline for motor finance firms to provide a final response to relevant customer complaints. This was introduced to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market.

As part of its review, the FCA is working to understand how DCAs affected the cost of credit for people borrowing money to buy a vehicle. This involves assessing thousands of records spanning 14 years. While many firms have engaged with the review, others have struggled to supply the data needed. Reasons for this include:

• firms not keeping older data;
• data being stored on multiple systems; and
• data being spread between lenders and brokers.

As a result of this delay, the FCA will not be able to set out next steps by the end of September 2024 as originally expected.

Motor finance is an important market, serving over 2 million consumers a year. In deciding next steps, the FCA will consider how to make sure consumers are appropriately compensated and the market continues to work well, with effective competition.

As with most types of consumer credit, motor finance is not protected by the Financial Services Compensation Scheme. If firms fail, consumers may not get back money they are owed.

What’s happened since the review began?

Whilst the review has been happening, Barclays Partner Finance has also started judicial review proceedings of the Financial Ombudsman Service’s decision to uphold a complaint relating to its use of a DCA. This adds one more reason to why the compliant handling pause is to be extended as the hearing is expected to take place in Autumn 2024, where the court will consider whether to grant permission and hear the claim. The judicial review will consider legal issues highly relevant to the FCA’s review and the regulator has stated that it will be awaiting the results of the court decision as part of its review.

The extra review time and additional data allows the FCA to design, consult on and introduce an alternative way of dealing with DCA complaints.

The FCA are proposing to give consumers until the later of 29th July 2026 or 15 months from the date of their final response letter from the firm, to refer a complaint to the Financial Ombudsman (instead of the usual 6 months). This is so consumers will not have to decide whether to refer their complaint to the Financial Ombudsman before next steps are announced by the FCA.