On Friday 12 April, the Financial Conduct Authority (FCA) wrote to the heads of a number of UK lenders, asking that they adequately prepare for the cost of customer complaints arising out its motor finance review, and assess their ability to meet potential future liabilities arising from customer complaints. As we reported last month, the FCA, in January, opened a s166 FSMA review into historic Discretionary Commission Arrangements (DCAs) in the motor finance sector.

By way of a reminder, DCAs allowed brokers, usually motor dealers, to set the rate of interest that the lenders would loan to the consumer, while receiving commission directly linked to the selected rate of interest. The FCA’s intervention followed two Financial Ombudsman Service (FOS) decisions in favour of consumers that held that the two consumers in question were treated unfairly by the lenders due to, amongst other reasons, a failure to disclose the basis on which the lenders paid commission to the broker (which resulted in a higher rate of interest being charged to the customer than they otherwise would have accepted had they known the details of the commissions arrangements).

In February, Close Brothers suspended the payment of a dividend and Lloyds provisioned £450m to deal with these complaints.

Friday’s communication, coupled with FCA CEO Nikhil Rathi’s comments last month that it is “improbable” that the review will find nothing, as well as the response of some lenders to reserve funds, suggests that this may end up costing UK lenders a significant sum. Further, consumer-focused websites are actively encouraging potentially affected consumers to bring complaints, offering assistance in doing so. One such website claims it has been used to submit more than 1 million complaints against lenders. Increasing public awareness of this issue has the potential to inflate the costs of this review further.

That said, there remain unknowns and the review is still in its relatively early phases. Notably, Barclays have reportedly commenced a judicial review against the FOS decision of 10 January 2024, one of the two which decided in favour of consumers and seemed to have sparked the FCA’s s166 FSMA intervention. Further, although the FCA is still expected to report further on its findings in September 2024, it has also indicated that this could be extended, if necessary, noting the Barclays challenge and that whilst companies involved in the review have been co-operating constructively with the FCA, some were struggling to provide the data needed.