FCA warn lenders to make provisions for potential pay-outs amid motor finance probe

The FCA have released a statement warning motor finance companies to ensure they reserve money for potential pay-outs, as it continues its probe into discretionary commission arrangements (DCA).

The FCA have written to motor finance providers warning them to maintain “adequate resources at all times” to cover potential compensation pay-outs as it continues its probe into DCAs.

The regulator called on lenders to assess their financial resources, considering risks, potential liabilities (including redress liabilities) and the impact that any capital reduction, such as dividend payments, would have on their ability to meet future compensation payments. Some lenders have already set aside provisions, including Lloyds Bank which has reserved £450 million for potential redress.

The update also noted that whilst firms involved in the review had “engaged with [the regulator] constructively”, many firms were “struggling to promptly provide data” required for the investigation. Reasons given for this include data being stored on multiple systems, spread between lenders and brokers, or firms not retaining all relevant records.

Furthermore, the FCA has asked that during its review, lenders to continue to scrutinise complaints related to DCAs so that they can 'act promptly to resolve them' if the pause on responding to complaints is lifted, and to be notified if motor finance companies become involved in litigation concerning DCAs that is, or may be, subject to appeal.

The FCA launched an investigation into DCA agreements in January, after it was found that some lenders had allowed dealers to select higher interest rates for customers to increase the commission they received essentially incentivising brokers to charge more for loans.

Since the regulator banned the agreements in 2021, motor finance companies received a high volume of complaints from customers claiming compensation for historical commission arrangements, most of which were rejected by firms who did not consider that they acted unfairly or breached relevant legal or regulatory requirements.  

After the Financial Ombudsman Service and county courts began to consider and upheld some of these rejected complaints, the FCA directed lenders to pause responding to complaints received past the 17 November and began an investigation into the motor finance market.

In January, the ombudsman service reported to have heard from over 10,000 people who suspected that they were overcharged for finance and has confirmed it will look to secure settlements if widespread misconduct is identified.

The regulator has acknowledged that its investigation will cause uncertainty within the sector and pledged to set out the next steps of its review by 24 September 2024 at the latest.