FCA announces work on motor finance – section 166 report and changes to the complaints process

As a result of high volumes of customer complaints and claims relating to motor finance commissions, the FCA has launched a section 166 skilled person report reviewing historical use of ‘discretionary commission arrangements’ (DCAs) between lenders and credit brokers to determine whether customers could be due redress.

Due to this, the FCA has brought in temporary changes to the complaints rules for complaints that may be affected by the report.

Broadly, DCAs were arrangements where motor dealers (acting as credit brokers) were able to adjust interest rates in credit agreements and the amount of commission the motor dealer earned was linked to the interest rate charged to the customer. Allegations in complaints and claims received by motor finance providers and dealers include that this created a conflict of interest and unfairly led to customers paying higher interest rates in respect of their car loans. DCAs were banned in 2021.

Skilled person report

Initial indications are that the report could look back as far as 2007 (long before the FCA took over regulation of the consumer credit industry). A number of firms who will be included in the section 166 report have already been contacted about it. Depending on the outcome of the report and the scale of any redress required, the FCA could either:

• Set up a consumer redress scheme
• Bring a Financial Markets Test Case (similar to the test case brought in relation to Covid-related business interruption insurance claims) or
• Allow complaints to continue under the usual processes

Specifically, the skilled person will review a large sample of customer files to consider:

• The arrangements between lenders and brokers; and
• The information provided to consumers at the point of sale, including how commission was disclosed

Complaints final response pause

The FCA has also announced a change to the rules for providing responses to complaints whilst the section 166 report process is completed. The changes will apply to DCA complaints relating to motor finance regulated credit agreements entered into before 28 January 2021, where the motor finance provider or broker:

• Received the complaint between 17 November 2023 and 25 September 2024 inclusive; and/or
• Sent its final response to the complaint between 12 July 2023 and 20 November 2024 inclusive

Key points to note:

• Only applies to DCAs
• Only applies to certain complaints (see timescales above);
• Does not apply to consumer hire (it only applies to regulated credit agreements); and
• The rules do not prevent firms providing a final response

The amendments for these DCA complaints include:

• A 37-week pause (starting 11 January 2024) in the 8-week period for providing final responses; and
• An extension from 6 to 15 months after the final response for customers to refer complaints to FOS where the firm has sent its final response between 12 July 2023 and 20 November 2024.

For complaints where the time period for a complaint has started (and is part way through), the clock is paused, and you will have the remainder of the 8-week period to provide the final response after the 37-week pause has ended.

What should motor finance providers and dealers be doing in response?

The amount of work required will depend on whether you are included in the section 166 report. If you are included, you should seek professional advice on engaging in meetings and preparing for the report (if you would like to speak to us about this, we would be very happy to assist). Even if you are not included in the section 166 process, you should be taking the following steps.

1. Create a project plan
2. Identify all “in-scope” DCA complaints (see above) and the actions you now need to take
3. Update policies and relevant process documents (prioritising any consumer-facing complaints), including record retention rules and policies
4. Promptly respond to new DCA complaints
5. Continue to deal with “out-of-scope” complaints

How we can support you

We have experience advising firms in relation to section 166 skilled person reports and have advised a number of clients on commission complaints and claims, including successfully responding to pre-action disclosure applications (in which we have been successful in obtaining favourable costs awards). Given our detailed knowledge of the regulatory regime, the automotive sector and having experience with dealing with FCA supervisory action, we can assist with project planning, drafting responses to complainants, updating policies and processes and on responding to the FCA and any skilled person report.

If you wish to discuss this further, get in touch with Adam Edwards.