UPDATED: The Financial Conduct Authority (FCA) has today hit out at car finance companies who have failed to adhere to the rules introduced on discretionary commission arrangements in 2021.

In a statement today, the regulator said that it would “review historical motor finance commission arrangements and sales across several firms.”

In 2021, the FCA banned certain commission models, removing the incentive for motor finance brokers and dealers to raise interest rates in order to earn higher commissions.

However, a high number of complaints from customers to motor finance firms claiming compensation for commission arrangements were logged prior to the ban, the FCA reported.

Whilst complaints have been rejected by the motor finance firms, the Financial Ombudsman Service found in favour of complainants in two recent decisions – Black Horse Limited and Clydesdale Financial Services Limited (trading as Barclays Partner Finance).

“There is significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements,” the FCA said in a statement today.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way,” the FCA added.

The FCA will be pausing the deadline for motor finance firms to provide a final response to relevant customer complaints. Customers will also have up to 15 months to refer their complaint to the Financial Ombudsman, rather than the usual 6 months, where customers received a final response between 12 July 2023 and 10 January 2024 or where a final response is sent between 11 January 2024 and 20 November 2024.

The pause, introduced without consultation from today, will last for 37 weeks and is designed to prevent “disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms.”

The FCA has noted that, “it is particularly important to manage these risks because, in line with most types of consumer credit, motor finance is not protected by the Financial Services Compensation Scheme”.

In response to the FCA’s announcement, Stephen Haddrill, Director General of the Finance & Leasing Association said: “We welcome today’s announcement as the pause will ultimately provide certainty for firms and customers after a period where speculative and unfounded complaints issued by Claims Management Companies have congested what should be a smooth, prompt and clear process.

“We will work with the FCA over the coming months to resolve this issue.”

Abby Thomas, Chief Executive and Chief Ombudsman, welcomed the FCA’s decision to assess the issue further, commenting: “When people take out a car loan it’s imperative they are treated fairly and the financial implications are totally transparent.

“Unfortunately, that is not always the case. We’ve heard from more than 10,000 people who fear they were charged too much for their finance, and we know many more are waiting in the wings.

“We’ve resolved two complaints where we found that the way the commission arrangement between the lender and the car dealer worked was unfair on the consumer. Our decisions could signal the way forward for many more similar complaints that have not been resolved between firms and consumers.”

Commenting on the announcement, Wayne Gibbard, Partner and co-head of Financial Services Sector at Shoosmiths LLP said: “The announcement from the FCA today is likely to be welcomed by many firms, who continue to grapple with spurious claims from CMCs. This is now to be balanced against the continued uncertainty of the FCA’s review of the sector through the use of s.166 and other activity. It has taken some time to get to this point, which has not helped firms or consumers in managing these issues, but it does at least now provide a pause on some of the operational stress. As we have seen, motor finance remains a hot topic for the FCA and is clearly on the radar again in 2024.”

Asset Finance Connect will be reporting on this topic more fully in the coming days and weeks. Please email lisalaverick@assetfinanceconnect.com with your comments on this developing story.