Why is the FCA concerned about car loan commission?

The Financial Conduct Authority has announced it is looking deeper at historical agreements between motor finance companies and their brokers or car dealers because of mounting complaints, some of which have been upheld by the Financial Ombudsman Service. But what is causing its concern?

It's rising levels of complaints. Claims management companies (CMCs), legal specialists that fight cases to win consumer's compensation, are still searching for the next PPI-misselling style national scandal and many CMCs are testing whether motor finance firms are a prime target.

And just recently the Financial Ombudsman has upheld some claims that centred on commission. Black Horse Motor Finance was ordered to pay compensation to Mrs Y, who bought a car in 2016 using its point of sale finance, because it ruled the discretionary commission model Black Horse used in Mrs Y’s case "created an inherent conflict between the interests of the broker and the interests of Mrs Y, as it gave the Broker an incentive to set a higher interest rate than Black Horse would have accepted so that the Broker could receive more commission", and that Black Horse failed to have due regard to Mrs Y’s interests and treat her fairly.

And it made the same ruling in a case between Barclays Partner Finance and Miss L, who took out a conditional-sale agreement to buy a car in November 2018. She was not made aware beforehand that the broker received commission from Barclays Partner Finance for arranging the conditional-sale agreement nor that the commission was linked the interest she paid on the loan. The ombudsman found BPF did not treat Miss L fairly.

Although Financial Ombudsman decisions are based on the specific facts of individual cases, these decisions are likely to alert other consumers and their representatives to the possibility of receiving redress for the way their motor finance agreement was sold, significantly increasing complaints.

"Given the number of motor finance agreements involving DCAs, we anticipate that there could be many more complaints raised with firms which could also potentially be referred to the Financial Ombudsman if rejected by firms. We recognise that the Financial Ombudsman’s decisions are the trigger for an increase in DCA complaints, rather than the cause of those complaints," it said.

Some 30,000 complaint cases were rejected by motor finance firms between 2019 and 2023, many of which could have related to DCAs. Many rejected cases then get referred to the Financial Ombudsman Service, and the FCA recognises that since the recent successes there is a likelihood that thousands more claims could be on the way, which motor finance firms must manage carefully and consistently.

The FCA added: "We want to ensure that consumers who have been harmed by motor finance arrangements with DCAs, are provided with appropriate redress from firms in an orderly, consistent and efficient manner and in a way that protects and enhances market integrity.

"Given this outcome, we recognise that giving firms more time to handle DCA complaints may seem counterintuitive. However, as set out above, we are concerned that the current time limits for responding to complaints may prevent us from achieving an orderly, consistent and efficient resolution. So, the direct outcome of the rules set out in this policy statement is to manage the risk of harm that is presented by the time limits in the current complaint handling rules while we carry out work to identify whether an alternative approach would be more appropriate in the longer term."