The Financial Conduct Authority has certainly found “issues” in the ways that motor finance was offered or incentivised in the past and the ongoing review will determine the breadth of those issues, and what system of redress will be needed.
That’s according to FCA chief executive Nikhil Rathi, who gave an update on the progress of the finance and insurance regulator’s investigation into historic car loan commissions on the latest Inside FCA Podcast.
The regulator has just extended the timescale of its review, which was triggered by ombudsman cases regarding discretionary commission arrangements and disclosure to buyers, into spring 2025.
Rathi said: “By May next year, May 2025, when we will have the opportunity to have looked at all the data, understood what the courts have said as well, and one of the possibilities, although we haven’t taken a final decision yet, is that we might put in place what we call a redress scheme, which is a scheme that applies across the market, or part of the market, and allows for a consistent way to manage redress for consumers.
“If we go down that route that has to be consulted upon and it takes time to put together. And so on a precautionary basis we have extended a pause in complaints all the way to December 2025, but obviously if we can go quicker, we absolutely will.”
The review is examining whether the discretionary commission arrangements that were used prior to the ban introduced by the FCA in January 2021 were operating in a way which was consistent with the law and regulation that was in place at that time.
Rathi added: “This work has been underway now for a number of months and what we have found is that there are issues and there have been issues in this market.
“And what we’re looking at is the scale and breadth of those issues.
“That’s why I’ve said it’s unlikely at the end of this that, you know, we’re going to find nothing.”
From the data the FCA is examining, it will propose a fair route to redress for consumers who’ve unwittingly been victim of a breach.
He said one option is to allow firms to continue to process complaints in the normal way, “and that might be a route we choose for some situations”, but now that a picture of the issue is becoming clearer it is looking more likely that some kind of structured redress mechanism may be necessary.
The problem of missold payment protection insurance was resolved by a FCA-implemented compensation system, which led to regulated firms paying out millions of pounds.
He doesn’t expect the redress for the motor finance issue to be of the same scale as the PPI scandal.
Rathi was keen to emphasise that the FCA has an objective to protect consumers but also to to make sure the market functions well now and in the future, so his team must also be thinking about how to ensure that any action also supports the continued supply of motor finance to millions of consumers who depend on it.
“Nearly 80% of households in the United Kingdom own a car, so it’s really important that we make sure that market continues to function fairly and well in the future too,” he added.
Asked whether he recognises the risk that some firms involved in motor finance might fail, he responded that this is “a really important point” and added: “We have worked really hard to understand the financial position of different firms.”
Motor finance is not covered by the Financial Services Compensation Scheme, which means that if a motor finance provider goes bust and lacks enough resources to pay creditors its customers would get no redress.
That was why in April the FCA wrote to firms to ask them to pay particular attention to their financial resilience. An underlying message was to preserve funds, such as by not paying out large dividends to shareholders.
“Under FCA rules, a regulated firm must always make sure it’s got adequate financial resources to meet its obligations, to meet its liabilities.
“And any firm that may be thinking that it could have a redress liability coming up in the future needs to make sure that it maintains the appropriate level of funds to prepare for that liability, so we’ve asked firms to make sure they tell us if they’re thinking of any significant distributions to their shareholders or any other way in which their funds may be dissipated,” he added.
On the extension of the review, Rathi said it has taken a bit longer than expected for firms to provide the FCA with the data that will help it understand the scale of the historic motor finance commission issue. Add to that the judicial review of one Financial Ombudsman Service ruling that is likely to be heard in the autumn, and a couple of related cases in the Court of Appeal, and the FCA clearly needs the extra time.
“We’re certainly working to make sure that we have a consistent outcome, efficient outcome, and that we’re able to give some clarity as soon as we can using the legal powers available to us,” he added.
“And I’ll end by saying we absolutely understand the uncertainty that this work has caused for consumers and the market, and we are working really hard to make sure we can resolve these issues and give a clear path forward as soon as we can.”
Listen here to the Inside FCA Podcast: Nikhil Rathi on reviewing the motor finance market