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Vehicle finance could drive redress scheme

15 January 2024. Published by David Allinson, Partner

We're barely into 2024 and it looks like vehicle finance arrangements could drive forward the next miss-selling saga. The volume of complaints in this area has prompted the FCA to suspend and extend certain time limits and an industry wide redress scheme could be on the horizon.

On 11 January the FCA published a policy statement (PS24/1) concerning changes to complaints handling rules for motor finance complaints. Such changes in isolation are unlikely to inflame passions, but (at least to me) the policy statement becomes far more intriguing when one looks at the issues it seeks to address and how the FCA proposes to do this.

To provide context, the furore here concerns the historical use of discretionary commission arrangements (DCAs) in the motor finance industry. Under such arrangements, commission on car finance loans could be linked to the level of interest payable by the consumer. As brokers had (in the FCA's words) 'wide discretion' to set or adjust the interest rate, there was concern that consumers might have ended up paying more for loans than they needed to. The FCA imposed a ban on such commission arrangements in 2021, following a review of the market that took place between 2017 and 2019. 

The statement notes that there has been a sharp increase in complaints about such arrangements since the ban came into force; data from the industry shows that between January 2019 and June 2023, firms closed around 30,000 complaints concerning DCAs, with 99% of these being rejected. Despite the very high rejection rate, consumers are not accepting that there is no case to answer, as 10,000 complaints about DCAs had been referred to FOS by December 2023, with 90% of these referred since the start of 2022. The FCA anticipates that complaint volumes will continue to increase, and a number of claims have been issued in the High Court. 

The proposed changes to the complaints handling rules will pause, for a period of 37 weeks, the need for a firm to respond to a complaint within 8 weeks. There is also an extension of the timeframe in which a complaint can be referred to FOS, from six months to 15 months.  The purpose of the changes is to reduce the risk of disorderly, inconsistent, or inefficient outcomes which could arise due to the volume of complaints. However, the real concern for firms affected (and their insurers) could come as a result of what the FCA is intending to do next. 

The statement notes that the FCA will complete diagnostic work to assess practices within individual firms to determine whether there has been a widespread failure to comply with the relevant requirements and, if so, whether or not redress is owed. The FCA states that they intend to use s.166 of FSMA for this purpose, which gives them the power to obtain a report from a skilled person. More worryingly, they state that it may be appropriate (depending on the outcome of the diagnostic work) to set up an industry wide redress scheme under s.404 of FSMA. The thrust of this blog may concern cars, but s.404 redress schemes seem to be more like buses, as we waited for over 10 years for one to turn up (which it did in the form of the British Steel Review) and it now looks like we might have two at once.

It could be that we are looking at the start of the next large-scale mis-selling scandal; whilst individual losses might be small on a per-complaint basis, the cumulative sums at stake under an industry wide redress scheme could be significant. It's also worth noting that any assessment of complaints would be done, to some extent, through the prism of the Consumer Duty, and we have no doubt that the FCA will want to demonstrate that this has teeth. We'll be keeping a close eye on this but for now, it looks like vehicle finance could cause a significant bump in the road!