Eddie Flanagan, partner at law firm Shakespeare Martineau, notes that it while a spotlight remains on the UK’s motor finance market due to important legal actions it is critical for lenders to be continuously refining their data and practices.
Trust and Transparency, the key drivers required by the FCA and the courts post Johnson, Hopcraft and Wrench.
The FCA is exerting its influence and scrutiny across a range of sectors, in order to ensure that these businesses operate in a manner that delivers the best outcomes to their consumers. There has been a particular focus on the automotive industry, whilst the FCA’s investigation into the Discretionary Commission Arrangements (DCAs) is well documented and that concern has been further exacerbated by the Court of Appeals October judgment in the case of Johnson, Hopcraft and Wrench.
A further headline from October last year focused on the Financial Conduct Authority (FCA) fining Volkswagen Financial Services (VWFS), for failing to support customers in financial hardship. This development sends a clear signal to lenders in the automotive industry, as well as distinctly marking the FCA’s attitude and commitment to consumer outcomes, meaning that consumers should be kept free from harm.
VWFS was fined £5.4m by the FCA for failing to provide tailored needs for certain vulnerable consumers. The FCA has set high standards of consumer protection across financial services and requires firms to put their customers’ needs as a fundamental objective of their businesses.
In this case, the FCA found a host of failures from VWFS, who showed a lack of empathy towards customers unable to make re-payments through no fault of their own, impacted by the cost-of-living crisis and Covid. VWFS avoided a higher fine of £7.7 million by cooperating with the investigation and has since apologised and introduced a new debt-collection approach. The vast majority of new cars in the UK are bought using some form of finance, and this crack-down on lenders, demonstrates the FCA’s commitment to holding lenders accountable for the well-being of their customers during financial hardship and indeed the life of the contractual agreement.
In the motor finance industry most of the dissatisfaction, be it justified or otherwise, is directed towards lenders.
Some say this is due to their alleged profitability and controversial use of DCAs. Put simply, DCA’s used to give lenders control over the interest rate charged to the customer. The FCA’s comprehensive review of motor finance this year, centering around the use of DCAs, demonstrates they played a role in around 75% of car finance deals from 2007 to 2020. However, they have been banned since 2021, and shortly thereafter, followed by calls for a payment protection insurance (PPI)-style redress scheme. This invoked the FCA’s authority under the Financial Services & Markets Act to investigate the use of DCA’s and general debt collection practices, as well as potential misconduct within the motor finance sector at large.
Johnson, Hopcraft and Wrench
These three cases were heard at the same time and judgment was delivered last October. It arrived with momentous impact.
The case is being appealed on an expedited basis and is due to be heard in April this year. The case ruled that a used car salesman had a fiduciary duty to his or her customers. Meaning they should have provided the best products.
The case further addressed secret and half secret commissions and found that they should not have been taken without the “informed consent” of the customer. Initially it was thought this case would only affect consumers that were subject to Consumer Regulated agreements. However, the rationale spread like wildfire to a number of commercial arrangements.
How will the Supreme court react?
Rising customer dissatisfaction has heightened scrutiny of past practices, but there’s also concern over the fairness of holding lenders accountable to these new standards. Are the regulators and the courts going to apply the Consumer Duty lens to historic cases?
Therefore, to help identify the ‘bad apples’ in the industry in a ‘fair’ way, customer dissatisfaction is measured through a company’s complaint handling measures. As a result of the comprehensive FCA review, new complaint-handling rules were introduced to grant companies extended response times, covering complaints received between 17 November 2023 and 25 September 2024 and final responses sent between 12 July 2023 and 20 November 2024. This move is intended to ensure thorough case handling amidst the high volume of complaints, helping the FCA collate fair and proportionate results. These time frames are subject to continual review and may move further.
It’s clear therefore, that the FCA’s goal is to root out any ‘bad apples’ without compromising industry stability, ensuring that compensation, if due, is managed appropriately whilst also promoting innovation in the market. This approach seeks to balance consumer protection with fair treatment for motor finance companies that operated under different regulatory expectations at the time.
One of the takeaways from the VWFS case, is the need for automotive finance companies to stay on top of their debt collection and complaint handling measures, as well as being able to prove their practices are fair, and audit proof accordingly. As the FCA collates information using complaint logs and product sales data, any major delays, or a disproportionate number of complaints compared to other companies, will raise alarm bells and leave lenders vulnerable to similar investigations.
This in turn can have a devastating effect on operations and cause huge reputational damage. It is therefore important lenders are continuously refining their data, and ensuring complaints are logged and dealt with accordingly.
The question is – will these changes trigger other motor finance companies to tighten their processes to ensure they are treating their vulnerable customers fairly? The answer is it certainly should.
It’s clear the financial regulatory and judicial landscape is becoming increasingly stringent, with the FCA and indeed the courts, taking a more investigative approach to compliance. Those authorised by the FCA are now expected not only to understand and implement good debt-collection practices, but also actively audit their processes. This includes providing robust evidence that complaint handling systems align with the Consumer Duty. Failure to meet these expectations or deal with them as a simple ‘tick-box’ exercise will expose lenders in the sector to fines and reputational damage.
However, the automotive industry must be applauded for the swift reaction to both the judgment in Johnson and the regulatory cases such as VWFS and Santander. Processes and procedures have been sharpened to make them more transparent and to create an atmosphere of trust. The resilience of the sector should be noted accordingly.
Author: Eddie Flanagan, Partner at Shakespeare Martineau