The FCA announced in January that it was using its s166 powers under the Financial Services and Markets Act 2000 (FSMA) to review historic Discretionary Commission Arrangements (DCAs) in the motor finance sector, stretching back over a decade, following an uptick in customer claims. DCAs allowed motor finance brokers (typically vehicle dealers) to select the rate of interest on a vehicle loan to a purchaser, while receiving commission from the lender (usually a subsidiary of a large financial institution) that was directly linked to that interest rate. The higher the rate, the higher their commission. 

This may strike the reader as unfair, or possibly creating a conflict of interest for the broker who must arrange finance for their borrower customer while making representations on the part of the financial institution lender at the same time. Either way, the FCA banned DCAs in 2021, after a 2019 consultation.

Following two Financial Ombudsman Service (FOS) decisions in favour of consumers, and recognising these rulings may well fuel further claims, the FCA announced its s166 FSMA intervention and brought in temporary rules regarding complaints handling. The FCA expects to set out its next steps in Q3 2024 and should it find widespread wrongdoing on the part of lenders (and brokers), an industry-wide s404 FSMA redress scheme is a real likelihood. Even if the average payout in any review might be modest, the prevalence with which DCAs were used until they were banned would be enough to invoke considerable costs for firms (and, subject to coverage, their insurers). One affected lender, Lloyds Banking Group, has set aside £450 million to cover the cost of the FCA probe. Another, Close Brothers, recently suspended a £100 million dividend for the same reason. Industry analysts estimate that the total bill for the sector could be as much as £8 billion. Whilst significant, this is someway short of the £50 billion bill paid in relation to the payment protection insurance (PPI) scandal, with Nikhil Rathi, CEO of the FCA, commenting recently “I do not anticipate this issue playing out as PPI did, not least because we have intervened early in the interests of market orderliness.”

However, given the possible higher volume, lower value nature of any affected consumer population, one might expect the defence costs to be disproportionately high vis-à-vis the final redress bill due to consumers.

The drop in share price of some affected lenders also opens up a possibility of related claims against the management of these entities, particularly if regulatory issues with these DCAs have been on management’s radar for some time.

The FCA’s intervention comes at a time when scrutiny of consumer dealings and the retail loans industry, in particular, seems greater than ever, spurred on by the introduction of the Consumer Duty. January’s announcement comes hot off the heels of its October intervention in respect of PayPal and QVC. Recent FCA data suggests that more than a quarter of UK adults use Buy Now Pay Later arrangements for their purchases, and with many other firms charging commissions on their services, the outcome of this review may resonate beyond affected lenders and consumers.