In the world of motor finance, the spotlight on Discretionary Commission Arrangements (DCAs) has intensified, not least due to the influential coverage of consumer champion Martin Lewis. This heightened attention, coupled with the ongoing investigation by the Financial Conduct Authority (FCA), places motor finance businesses at a critical juncture.
Navigating this landscape requires a proactive stance, ensuring not only regulatory compliance but also actions to minimise possible negative impacts on consumer trust and business operations, as industry-wide redress costs are expected to run into the billions.
How the DCA investigation came about
The current investigation has its roots in the Financial Ombudsman Service’s (FOS) prior scrutiny of commission deals between lenders, typically those specialising in motor finance and brokers, such as motor dealers and dealer groups. These examinations investigated complaints, finding that these arrangements breached fairness principles under the Consumer Credit Act, ultimately harming consumers. The verdict mandated lenders to refund any excess interest consumers were unjustly charged, ensuring a fair resolution.
Responses from the FCA
Given this precedent and the historically widespread nature of similar commission practices, the FCA stepped in with urgent measures. They introduced temporary rules for handling complaints to avoid a surge in DCA-related grievances and inconsistent decisions. Additionally, the FCA will commission a number of s166s (a requirement by a business to provide a detailed and comprehensive report), all intended to ensure that the FCA have an in-depth understanding of the issue’s size and materiality.
The FCA have indicated they will announce the outcomes and conclusions from their investigation by the 24th September. Based on Jaywing’s extensive experience working with some of the UK’s leading financial services organisations, including on similar remediation programmes, we recommend businesses should begin preparations now and adopt a two pronged approach: addressing immediate needs first, whilst also laying the groundwork for actions required when the outcomes of the FCA investigation are finalised.
Immediate Actions for Motor Finance Businesses
Complaints Handling
The immediate challenge is managing a surge in complaints and the operational demands this entails, and further challenges if these ultimately lead to Data Subject Access Requests (DSARs).
Adapting processes to efficiently handle this is crucial, both now and after the FCA’s findings are released. The forecast is a steady rise in regular and DCA-specific grievances, necessitating robust strategies for managing workload, categorising complaints, and maintaining high standards of customer communication throughout the resolution process. Firms with more sophisticated tools and technology can enter the complaints onto their systems and confirm eligibility by merging to historic customer databases, employing matching algorithms where required. The less technologically advanced may have to establish more manual labour-intensive processes.
Impact Assessment
It will be essential to conduct thorough reviews of your motor portfolios to identify the eligible population and assess the financial implications, ensuring readiness for potential redress actions. This is not a process to be underestimated, it will be onerous and complex. There may also be a requirement in the interim, depending on internal governance requirements, to calculate an initial estimate of potential financial outcomes. Any assessment will need to be demonstrably robust and validated to satisfy regulatory and any internal requirements.
Data Investigation
Understanding any data weaknesses in terms of identifying eligibility and calculating the interest owed will be key to estimating the financial impact and planning the entire programme. There is an expectancy that the eligibility period will reach back to 2007; most, if not all, lenders will have upgraded or migrated their infrastructure in this 14-year period, adding further complexity to the data preparation. Information regarding the loan agreement, such as the interest rate, will be available to lenders, although it may be more challenging to confidently ascertain the interest rate that the customer should have been offered without the DCA. In our experience, where there is uncertainty around the data, the redress calculation must resort to conservative assumptions that benefit the affected customer. Further data challenges such as dealing with changes in customer addresses, deceased customers and debt sales cause additional complexity.
Remediation Planning
A redress programme typically requires specialist expertise and additional head count within operations, legal, finance, risk, IT, all supported by effective programme management and appropriate overarching governance protocols. Early planning for a remediation programme will enable your firm to quantify resource requirements and then arrange and assign roles and responsibilities across your internal teams with external parties engaged early to secure any supplementary resources.
Looking Ahead
Given the expected complexity of the likely action required, businesses should be using the time between now and then to understand their own position and be prepared for a possible directive to follow from the FCA.
The way that businesses address this, and the speed at which they are able to do so, will make a huge difference financially, operationally and reputationally. Where there are optimised processes in place at the earliest opportunity, remediation costs can be managed.
If businesses want to act fast, they should consider partnering with experts covering data management, regulatory compliance, credit risk analytics, legal guidance, and ideally experience of similar prior remediation programmes.
Such collaborations can provide the necessary depth of expertise and experience to navigate the intricacies of the remediation process effectively, ensuring compliance, safeguarding consumer interests, and reinforcing their commitment to ethical business practices. Jaywing’s track record, marked by intricate projects spanning risk and finance with the likes of Virgin Money, HSBC, Starling Bank, Secure Trust Bank and Skipton Building Society, positions them as an ideal partner to undertake this critical evaluation.
Find the original article on Credit Connect here.