“PPI on wheels” – an update on the FCA review of discretionary commission arrangements in the motor finance industry

Introduction to DCAs and the FCA review

Discretionary Commission Arrangements (DCAs) are commission structures whereby lenders allowed car dealers or brokers to determine the contractual interest rate on finance agreements (such as PCPs) for customers. That interest rate determined the amount of commission paid to the car dealer or broker under the finance agreement. Historically, this meant that car dealers and brokers could increase the interest rate a customer paid under their finance agreement in order to earn, while also earning themselves higher commissions.

In response to a review of the motor finance sector, the Financial Conduct Authority (FCA) banned DCAs in January 2021. Since then, the FCA has received a high number of complaints from customers about car finance arrangements they had entered before the ban, and instances of motor finance firms, car dealers and brokers rejecting those complaints on the basis that they did not act unfairly or cause customers to suffer loss.

Earlier this year, on 11 January 2024, the FCA announced that it would use its powers under s166 of the Financial Services and Markets Act 2000 (FSMA), to review historical motor finance commission arrangements. This work was originally expected to be completed by 25 September 2024, but the FCA recently announced that it now expects to set out the next steps in its review in May 2025.

If, following the review, the FCA concludes that there’s been widespread misconduct, it has said that it will identify how it can ensure that customers who are owed compensation receive settlement consistently and efficiently. The most likely route may be through a consumer redress scheme, similar to that which was used for Payment Protection Insurance (PPI). According to the Royal Bank of Canada, the industry could have to pay up to £16 billion if they have to compensate consumers through a consumer redress scheme, as they did after the PPI scandal.

The pause 

Motor finance firms/car dealerships would usually have eight weeks to provide a final response to a customer’s complaint. This eight-week deadline is currently “paused” for DCA complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.  In its recent update, the FCA extended that pause until 4 December 2025, although firms can still provide a response before the end of the pause if they wish to do so. 

In addition, customers will have up to 15 months to refer their complaints to the Financial Ombudsman Service (FOS) following the firm’s final response, as opposed to the usual six months.

What should motor finance firms/dealerships be doing in the interim?

Dealing with complaints

Firms still need to acknowledge complaints promptly in writing. They should also investigate complaints and provide information about the pause if the complaint is received within the current pause period. Complainants should be referred to the information about DCAs on the FCA website and kept updated on the progress made in relation to their individual complaint, if any.
If a complaint had already been acknowledged or a final response had been sent before the pause began, the firm should update the customer in writing about the pause and the extension of time (i.e. 15 months) to refer the complaint to the FOS.

Preserving evidence

It’s worth noting that one of the significant issues for firms conducting previous redress schemes has been a lack of evidence. Motor finance firms, car dealerships and brokers should take steps to preserve and collate documents and information relating to potential claims about DCAs to assist with responding to complaints and claims in due course.

Ensuring sufficient financial resources

All firms should ensure that they have the financial resources to cover the cost of dealing with customer complaints and queries in accordance with the FCA’s Threshold Conditions and Principles for Businesses. The FCA has warned firms about this risk, particularly as motor finance is not protected by the Financial Services Compensation Scheme.

In its “Dear CEO” letter dated 12 April 2024, the FCA stated that it expects firms to:

• Assess the adequacy of their financial resources.
• Ensure accuracy of financial statements and regulatory reporting.
• Make adequate disclosures to the FCA; make adequate disclosures to group stakeholders (if applicable); and
• Deal with DCA complaints and subject access requests appropriately.

How can we help?

If you require any further information, or you wish to speak to a member of our team about DCAs, please get in touch.