The Financial Conduct Authority (“FCA”) in its recent Consultation Paper CP24/15 (“CP”), aimed to address the ongoing concerns and complexities surrounding motor finance complaints, particularly those involving Discretionary Commission Arrangements (“DCAs”). The CP proposes extending the temporary changes to the rules governing how motor finance complaints are handled, to ensure a more orderly, consistent, and efficient resolution process for consumers and firms alike.
Background
In January 2021, the FCA banned the use of DCAs in the motor finance sector. DCAs allowed brokers to set or adjust the interest rates on motor finance agreements, often leading to conflicts of interest where brokers had an incentive to increase rates for higher commissions. The ban was a significant step towards protecting consumers from unfair practices. However, the legacy of these arrangements has led to a surge in complaints from consumers who believe they were overcharged due to the use of DCAs.
Current Situation
Since the ban, motor finance firms have received a substantial number of complaints related to DCAs. Many of these complaints have been rejected by firms, leading to a significant increase in referrals to the Financial Ombudsman Service (“FOS”). To prevent disorderly outcomes and market disruptions, the FCA implemented a temporary pause on the usual eight-week deadline for firms to respond to DCA-related complaints. This pause was initially set to last until September 2024.
Proposed Changes
The FCA is now proposing to extend this temporary pause until December 2025. This extension is deemed necessary due to the complexity of the diagnostic work the FCA is conducting, which includes analysing data from firms (through reporting requirements), reviewing the impact of ongoing litigation, and assessing the potential need for a statutory consumer redress scheme.
The key proposals in the CP include:
- Extending the Complaint Handling Pause: The pause on the eight-week deadline for motor finance firms to respond to DCA complaints will be extended until December 2025. This extension is designed to provide the FCA with sufficient time to complete its diagnostic work and consider the need for a statutory redress scheme.
- Consumer Rights: The FCA proposes to continue allowing consumers more time to refer their complaints to FOS. Consumers who receive a final response from their motor finance provider will have up to 15 months to escalate their complaint, or until July 2026, whichever is later.
- Record-Keeping Requirements: Firms will be required to maintain and preserve relevant records that could be needed for handling existing or future complaints related to DCAs. This requirement will be extended until April 2026.
Rationale and Impact
The FCA believes that extending the temporary changes is essential to avoid inconsistent outcomes and unnecessary market disruptions. The extension will allow the FCA to conduct thorough diagnostic work, which includes assessing whether widespread consumer harm has occurred and, if so, determining the most appropriate redress mechanism.
From a consumer protection standpoint, this approach is intended to ensure that any compensation owed to consumers is delivered in a fair and timely manner. For firms, the extension provides additional time to prepare for potential resolutions and to manage their complaints processes more effectively.
Conclusion
The FCA’s CP outlines a clear and measured approach to dealing with the ongoing challenges in the motor finance sector related to DCAs. By extending the temporary changes to complaint handling rules, the FCA aims to balance the need for consumer protection with the operational realities faced by firms. Stakeholders are encouraged to submit their feedback on these proposals by August 28th 2024, to help shape the final regulations and ensure they effectively address the issues at hand.
Next Steps
The FCA invites comments on the consultation paper until August 28th 2024. Following this, the FCA will review the feedback and publish a policy statement by September 24th 2024, outlining the final rules and any further steps to be taken.
This CP represents a critical step in ensuring that the motor finance market remains fair and transparent, protecting consumers from potential harm while maintaining the integrity of the financial services industry.
How Can Complyport Help?
As experienced regulatory consultants, Complyport can assist firms in understanding the temporary changes to Motor Finance Complaint Handling Rules. We offer tailored support to ensure compliance and help firms navigate the complexities of the regulatory environment.
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