Motor Finance DCAs– No room for complacency

Three years after the regulator announced its ban¹ on Discretionary Commission Arrangements (DCAs)² firms are left to unpack historic practices as the Financial Conduct Authority (FCA) announces its intention to review historical motor finance commission arrangements and sales across several firms. In this blog, we step through the FCA action, what this means to firms with a DCA portfolio and outline some practical and strategic actions that firms should be taking now. 

Background 

28 January 2021 – The FCA implemented a ban on DCAs to mitigate the risk of customer harm arising from these commission models and the potential conflicts of interests they created between dealers and customers. The FCA also concluded there was a lack of clarity and transparency of information provided to customers in respect of these arrangements. 

A significant increase in complaints volumes relating to historic DCAs, with most of these complaints being rejected by firms, has raised concerns with the FCA, leading to this action. 

11 January 2024 – The FCA announced its intention to review historic motor finance commission arrangements and sales practices to determine whether there has been widespread misconduct and whether customers have suffered harm as a result³ .  An immediate (and temporary) pause to FCA complaint handling rules, specifically for complaints relating to DCAs⁴, has also been announced. At the same time as this publication, the Financial Ombudsman Service (FOS) published its final decisions on two DCA complaints⁵. The FOS found in favour of the customers in both cases noting that: the historic DCAs had caused an inherent conflict of interests; there was inadequate disclosure of the commission structure to the customer; and the arrangements resulted in a failure to treat the customer fairly. 

The FCA is using its powers under s166 of the Financial Services and Markets Act 2000, to review sales of historical motor finance commission arrangements across several firms to help inform its conclusions over the size and scale of any potential customer harm that has occurred, and any further actions that firms will be required to take to redress customers.  

What does this mean for firms?

Whilst it is not clear what conclusions the FCA will reach, given the scale of action taken by the FCA on this topic, combined with the precedent set by the two recently published FOS cases, there is the distinct possibility that some form of remediation will be required. In addition, the FCA has confirmed that it could extend the size of its sample of firms currently subject to the skilled persons review if it concludes that further information is required to fully inform its diagnostic work . Taking all of this into account, firms should take proactive steps and start preparation now. 

What actions should firms be taking now?

It is too soon to understand what the FCA is likely to conclude from this review; however, based on previous remediation programmes of a similar nature, it could take a number of approaches towards redress (e.g. an agreed redress methodology or an industry wide consumer redress scheme). Firms should spend this time in taking proactive steps to understand their potential exposure relating to the existence and structure of DCAs between 6 April 2007 and 28 January 2021. 

At this stage, firms should ‘Prepare, Engage and Deploy’ a programme to manage customer expectations and outcomes.  We have summarised below the key actions that firms can start taking now.

Prepare

Working Group – Firms should treat this as a major regulatory project and establish a formal programme or working group with representatives from the first, second and third lines of defence, including representatives from Legal at an early stage. The Working Group should identify and track completion of the key actions required, ensuring sufficient input and resourcing from key teams is obtained. 

Policies / Agreements – Firms should obtain records of all agreements with brokers / dealerships and customer finance agreements. Firms should factor into their planning that this is likely to be an onerous and time-consuming exercise. 

Oversight / Governance – Obtain relevant governance packs (including minutes) to help map a timeline of activity (from 6 April 2007 to 28 January 2021) by the firm and to help demonstrate any reasonable steps taken to manage the conflicts of interest arising from DCAs. This also includes evidencing what (if any) actions (including governance) have been undertaken by firms following the FCA’s initial March 2018⁶ update on its work in the motor finance sector through to the introduction of the ban on DCAs on 28 January 2021.  

Data – The availability of complete data sets across the investigation timeline is likely to be a challenge. The data will most likely be fragmented across various systems and possibly incomplete, due to internal data retention policies. Data Management & Analytics (DM&A) resources should commence identifying, preserving and reviewing the relevant data available to ensure that the populations are complete for those clients potentially impacted by this issue and the data can be appropriately reviewed and analysed. Consideration should be given to:

• Applicable agreement values (i.e. price of the vehicle, deposit paid by the customer, deposit contributions made by the lender/manufacturer, any discounts received by the customer and total charge for the credit etc);
• The range of APR that was available to the customer and the reason that the APR was selected;
• The actual interest rate applied compared to the range that was available to the customer;
• The flat rate of the motor finance agreement;
• The different brokers / dealerships the firm worked with including the services being offered and the basis on which the broker was acting;
• The commission arrangements employed including the level of disclosure provided to the customer on this arrangement; and 
• Total volume of loans advanced. 

Firms should fully understand the potential data / information gaps and identify other avenues of obtaining relevant information to support their analysis – for example, whilst at this stage contacting all dealers / brokers may not be appropriate, testing the extent of information available from a sample of dealers/brokers may be a sensible step.

Engage

Legal – Legal guidance and support is critical both in helping firms respond to the FCA / FOS and Claims Management Companies (CMCs) as well as engagement with other third parties.  Legal teams can provide senior management with advice and guidance (under legal advice privilege where required).

Deploy

Complaints Management and Handling – Existing technology, tools, workflow and resources will need enhancement to respond to complainants in a timely manner once decisions on next steps are made. This is especially important given the FCA’s focus on the handling of complaints in this area. However, it should not distract the current function from ‘business as usual’.   Specific focus areas include:  

• Review operational capacity including forecasting for the likely increases in DCA complaints, Data Subject Access Requests (DSARs) and FOS referrals, including resources to respond to initial queries and complaints from customers who may / may not have held an agreement with the firm;  
• Consider the skills and capability of existing complaints resources across all relevant customer contact channels to be able to distinguish between in scope and out of scope DCA complaints, to enable these complaints to be sufficiently recorded and categorised and to ensure that those that are in scope are pooled for a later resolution (once the FCA’s temporary pause has been lifted).  It is also important to understand that where clients have made multiple complaint points, those that do not relate to DCAs should still be progressed and resolved in the normal timescales. Each of these aforementioned areas will be critical in supporting firms to ensure the accuracy of their bi-annual complaints reporting requirements to the FCA⁸, bearing in mind that firms will still be required to undertake this activity whilst the pause is in place.
• Revise your communication and engagement plan to ensure that customers are adequately informed of the activity that is taking place by the FCA, are made aware of the complaints time limit changes for the resolution of their complaint and are kept informed of progress of their complaint.
• Ensure your technology is sufficiently robust to enable the workflow and MI / reporting, and efficient and controlled processing of complaints.

File reviews – Firms should consider undertaking file review activity across a representative and statistically valid sample of customer files in order to support the firms data analysis, to understand how the firms approach to DCAs worked in practice at an individual customer level and validate any potential exposures. This activity will also support the firm in understanding customer segments and identifying potentially higher risk customer cohorts, where there is a greater probability of detriment.

Next Steps and How Deloitte can help? 

The FCA will announce next steps by 24 September 2024. This provides a c.9-month window until firms can expect a formal update, conclusions and next steps from the FCA’s diagnostic work. It will be important for firms to use this time to assess the scale of their own impacted portfolio, including identifying the population, understanding the governance and controls in place, interest rate cards used and identifying any data / information gaps.  

Deloitte can help firms impacted, offering a multi-disciplinary service through our dedicated and highly experienced teams, ensuring firms have access to the capabilities and capacity necessary to help navigate through the required activities in this area.  Our services include:

• Regulatory compliance and conduct SME’s to provide advice, review and challenge to your programme of work. This also includes providing ongoing support to clients subject to the skilled persons review in preparation for this activity; 
• Managed solution capabilities including complaint handling and DSAR resource augmentations and managed outsourcing to support the increase in volumes; 
• Data discovery and analytics to help identify potential impact populations of customers, consider scenarios, identifying potential exposure and supporting provisions as appropriate; and 
• Legal advice and guidance (under privilege) covering the management of disputes, litigation, reviewing contracts and advising on contract enforceability.

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References:

¹ PS20/8: Motor finance discretionary commission models and consumer credit commission disclosure - feedback on CP19/28 and final rules (fca.org.uk)

² A DCA is a specific commission structure where car dealers or brokers have the ability to determine the interest rate on the customers finance agreement. The amount of commission earned by the broker is determined by the contracted interest rate.

³ FCA to undertake work in the motor finance market | FCA

⁴ PS24/1: Temporary changes to handling rules for motor finance complaints | FCA

⁵ Decision Reference DRN-4188284 (financial-ombudsman.org.uk) and Decision Reference DRN-4326581 (financial-ombudsman.org.uk)

⁶ Motor Finance – update | FCA

⁷ Per DISP 1.10.1R