UK Car Finance Discretionary Commission Scandal: A Guide For Car Dealers, Car Finance Firms and Motor Finance Credit Brokers
As the UK Car Finance Discretionary Commission Scandal unfolds, Car Dealers, Car Finance Firms and Motor Finance Credit Brokers find themselves at the epicentre of potentially substantial financial exposure.
Martin Lewis has likened the issue to the Payments Protection Insurance (PPI) scandal, which ended up costing the industry over £40bn in redress to consumers, along with hundreds of millions in operational costs to run the remediation programmes.
"My suspicion is when it finishes its investigation [the FCA] will set up either A) a redress scheme where it orders all the firms to pay redress to every effected customer even if they’ve not complained; or B) redress rules where it orders them to pay out redress based on a set formula, to those that complain.""The pay out would be either the interest on loans (which is big), the commission (which is big), or the whole loan (which is huge)."- Martin Lewis, Money Saving Expert
This guide helps Car Dealers, Car Finance Firms and Motor Finance Credit Brokers understand the background to the Car Finance Discretionary Commission Scandal and what they need to do to mitigate the impact on their business.
What is the UK Car Finance Discretionary Commission Scandal?
The UK Car Finance Discretionary Commission Scandal involves the practice, prevalent before January 2021, where lenders allowed brokers, such as car dealers and other car finance firms, to adjust the interest rates charged to customers on car finance loans such as Personal Contract Purchase (PCP) and Hire Purchase Agreements.
Higher interest rates resulted in increased commissions for brokers, creating an incentive to overcharge customers. The Financial Conduct Authority (FCA) banned this practice in 2021, but a high number of complaints from customers about overcharging persisted.
The FCA is now conducting an investigation to assess the extent of the issue, potentially leading to compensation for affected consumers. Car Dealers and Car Finance Firms face significant exposure and are advised to quickly evaluate their involvement, calculate potential compensation, and prepare for a potential surge in complaints.
As set out in PS 24/1, The FCA has temporarily paused the DISP 1.6.2R 8 week complaint resolution requirement for affected Discretionary Commission Arrangement (DCA) complaints, for a period of 37 weeks beginning with 11 January 2024 and ending with 25 September 2024 (‘the pause’). This will mean, unless the firm decides to respond to their complaint, consumers will not be able to refer their complaint to the Financial Ombudsman during the pause. Once the pause ends, the 8-week time limit will be reinstated and, unless [the FCA] takes further action, consumers will be able to refer complaints to the Financial Ombudsman again.
What do Car Dealers, Car Finance Firms and Motor Finance Credit Brokers need to do now?
Here are six immediate actions that all Car Dealers, Car Finance Firms and Motor Finance Credit Brokers should take to understand their potential exposure and plan their response.
Internal Assessment
Conduct an internal assessment to determine whether your dealership or finance firm had discretionary commission arrangements in place before January 2021, potentially exposing you to the Car Finance Discretionary Commission Scandal.
Customer Account Review
Review customer accounts and loan agreements from the relevant period to identify instances where interest rates were adjusted, leading to potential overcharging. This will help in understanding the extent of your exposure.
Complaints Review
Thoroughly review how your firm has handled previous complaints, especially those related to car finance and interest rates. Assess whether there is a pattern of incorrectly rejecting valid complaints, as this can increase your exposure in the current scandal.
Financial Exposure Calculation
Work with financial experts or regulatory consultants to calculate potential financial exposure, considering overpaid interest, commissions, and associated interests on affected customer accounts. This will aid in preparing for potential compensation payouts.
Complaints Management Plan
Develop a comprehensive plan to manage a potential surge in customer complaints. Ensure your team is equipped to handle complaints efficiently, adhering to regulatory requirements, and providing timely responses.
Handle existing and new complaints in accordance with the temporary rules in PS24/1
Per PS 24/1, paragraph 22.2: “On receiving any complaint, a firm must send the complainant a prompt written acknowledgment. [The FCA is] introducing a rule so that when a DCA complaint is received the acknowledgement must include an explanation of the pause to the time limit rules in DISP 1.6.2R. Where a firm has already sent a written acknowledgement to a DCA complaint, because the complaint was received before the pause commenced, [the FCA] requires firms to promptly inform the complainant of the pause and the reason for it. For all complaints within the scope of the pause, firms must also:
- direct the complainant to the information published on the FCA’s website that explains the reasons for the rules, and
- ensure the complainant is kept informed thereafter of the progress of the measures being taken for the complaint’s resolution.”
How can Braithwate help Car Dealers, Car Finance Firms and Motor Finance Credit Brokers?
Braithwate's Regulatory Remediation Service is ready to assist Car Dealers and Car Finance Firms in navigating the Car Finance Discretionary Commission Scandal. Here's how we can help:
Assessment and Understanding
Our experts can assist in assessing whether your firm is affected, providing clarity on the implications of the new regulatory requirements, and guiding you through the necessary steps to mitigate risks.
Financial Exposure Calculation
We understand the uncertainty of the scale of the issue will be unsettling for many stakeholders and may have a negative impact on the value of your business. We will help you quickly calculate the financial impact of this issue, allowing you to provide clarity to shareholders, employees and other stakeholders.
Complaints Review and Handling
Our team is skilled in reviewing complaints and taking a pragmatic view on where remediation may be needed. We understand the commercial factors facing our clients and seek to balance this with the need to comply with regulatory requirements and deliver good outcomes for consumers. We use modern cloud-based systems for managing large volumes of file reviews, ensuring a full audit trail of actions.
Remediation Programme Management
Benefit from our experience in handling large-scale, complex remediation programs. We can help minimise overall costs for your firm while ensuring fair outcomes for customers and compliance with regulatory standards.
Effective Dialogue with Authorities
Our established regulatory remediation team can facilitate a smooth and effective dialogue with the Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS), ensuring transparent communication throughout the process and reducing the risk of further regulatory sanctions.
Contact Braithwate today to get ahead of the scandal, minimise the impact on your business, and navigate the complexities of the Car Finance Discretionary Commission Scandal effectively.
Q&A: Understanding the UK Car Finance Discretionary Commission Scandal - A Guide for Car Dealers, Car Finance Firms and Motor Finance Credit Brokers
Q: What is the UK Car Finance Discretionary Commission Scandal?
A: The scandal involves a past industry practice where lenders allowed brokers, including car dealerships, to adjust interest rates on car finance loans before January 2021. Higher interest rates resulted in increased commissions for brokers, creating an incentive to potentially overcharge customers.
Q: How does this affect my dealership or motor finance credit broker?
A: If your dealership or motor finance credit brokerage engaged in discretionary commission arrangements before 2021, you may be exposed to the scandal. It's crucial to assess your involvement, understand potential financial exposure, and prepare for a surge in customer complaints.
Q: What actions should I take immediately?
A: Conduct an internal assessment to determine if discretionary commission arrangements were in place. Review customer accounts for potential overcharging, especially in interest rates. Also, assess how your dealership has handled previous complaints related to car finance and interest rates.
Q: How can I calculate potential financial exposure?
A: Work with financial experts or regulatory consultants to calculate potential exposure. Consider factors such as overpaid interest, commissions, and associated interests on affected customer accounts.
Q: Why is a comprehensive complaints management plan necessary?
A: With a potential surge in customer complaints, having a robust plan is vital. Ensure your team is equipped to handle complaints efficiently, adhering to regulatory requirements and providing timely responses.
Q: How can Braithwate assist my dealership?
A: Braithwate's Regulatory Remediation Service can help assess your dealership's involvement, provide clarity on implications, and guide you through steps to mitigate risks. Their expertise in managing large-scale remediation programs can minimize overall costs while ensuring compliance.
Q: Should I be concerned about regulatory authorities?
A: Yes, it's crucial to engage in a transparent and effective dialogue with regulatory bodies like the Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS). Braithwate can facilitate this dialogue on your behalf.
Q: What if my dealership incorrectly rejected valid complaints in the past?
A: Thoroughly review past complaints to assess if there's a pattern of incorrectly rejecting valid claims. This scrutiny is essential in mitigating additional exposure in the current scandal.
Q: Is there a time frame for taking action?
A: Immediate action is advised. The scandal is unfolding, and timely response and preparation can significantly impact your dealership's ability to navigate through potential challenges. The FCA’s temporary intervention, as set out in PS 24/1, comes into effect on 11 January 2024. This means firms do not have to provide final responses to DCA complaints within 8 weeks during the period beginning with 17 November 2023 and ending with 25 September 2024. The FCA plans to communicate a decision on its next steps by 24 September 2024 at the latest. In the meantime, firms are encouraged to continue to progress DCA complaints where possible during this period by continuing to investigate and collect evidence to help with their eventual resolution.
Q: How can I stay informed about further developments in the scandal?
A: Regularly check reputable sources for updates on the Car Finance Discretionary Commission Scandal. Staying informed will help you adapt your strategies based on evolving circumstances.
Consumer Guidance Section
If you believe you may have been affected by the UK Car Finance Discretionary Commission Scandal, here are essential steps to consider:
1. File a Complaint:
Promptly file a complaint with the firm involved, marking your claim. While the FCA has temporarily paused firms' responses to complaints, establishing your complaint now serves as a crucial marker.
2. Extended Timeframes:
The FCA has extended timeframes for referral to the Financial Ombudsman Service (FOS). If you received a final response between 12 July 2023 and 20 November 2024, you now have up to 15 months to escalate your complaint to the FOS.
3. Existing Complaints:
Existing complaints already lodged with the FOS or the courts will continue to be processed as normal. If your claim has been rejected, consider potential resubmission based on the FCA's investigation outcome.
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