Yesterday, the FCA issued a statement, updating the market on its work on the motor finance market in relation to complaints involving discretionary commission arrangements (DCAs). Additional information was issued through a consultation paper on extending the temporary changes to complaints handling arrangements, an FCA podcast interview with FCA Chief Executive Nikhil Rathi, and a conference call between the FCA and market analysts (a significant first for the FCA).
Most attention has been on the FCA's proposal to extend the current pause in firms handling DCA-related complaints from September 2024 to December 2025. The FCA's slow progress reflects the time needed to analyse the data collected from firms and to assess the outcome of ongoing legal action, including Barclays' application for a judicial review of a FOS decision to uphold a DCA complaint.
But what else can be we take from yesterday's announcements? In my view, quite a lot. This article builds on my earlier analysis here.
1. The FCA has not concluded that all DCA cases were wrong
The FCA has made clear it has yet to make any decisions, but still provides guidance that based on its work so far, an intervention - which means an 'alternative way of dealing with DCA complaints' - is more likely than when it started the review.
This is no surprise. It could even be good news, with an increased focus on different options for handling complaints and not only a redress programme.
Not every firm's use of DCA was always fully in the spirit of the FCA's guidance in its handbook at CONC 4.5.2 that states a lender should only enter into differential commission rates where such payments are justified based on extra work.
That's only guidance, not rules, but it fits alongside higher-level rules in the Handbook around Treating Customers Fairly. If any firms had abjectly ignored this, that would be wrong, and very difficult to remedy by customers making individual complaints.
So, an 'alternative way of dealing with DCA complaints' has logic to it for some complaints for some firms. But this might well exclude the large motor finance firms that permitted only a small range of commissions, with even the highest of this range set at a level that seems broadly reasonable given the total amount of work involved (which certainly isn't limited to the time spent with the customer).
Hence the scope of any FCA intervention is likely to be limited to a minority - and probably only a small minority - of car finance agreements involving DCAs .
If the FCA was going to conclude that each and every case where DCA was used prior to the ban in 2021 was wrong, it would have done so by now. That wouldn't require a lot of data, and neither does it need to wait for the outcome of the judicial review case.
The FCA also clarified yesterday that it does not see FOS decisions as 'determinative or binding' in terms of the approach it might take. Nikhil Rathi said on the podcast that 'listeners should not automatically assume that we would adopt the same approach as the Ombudsman'. So more evidence that the FCA has shifted its position from seeing this as a a 'standard' problem with a blanket remedy.
2. The FCA is recognising that this is complicated (it involves accountants)
Deciding whether use of DCA was against the FCA's rules at the time is far from simple, and the FCA seems to now be recognising this. The FCA reports that data is taking longer to gather than it had hoped, and has also been more complex than anticipated.
Even if the data can be found (and it's difficult to prove there was any obligation on firms to keep detailed data such as the time spent on each finance application) many questions will arise when reviewing it:
For example, was the DCA commission:
Set at, or towards, the bottom of the range available to the intermediary?
Set higher than the bottom of the range but where the dealer or broker had to do extra work?
Set higher than the bottom of the range but where the dealer or broker had higher costs, for example being based in London?
Set lower than the average cost of providing the broking service?
Given each and every case could be different, the quantity of data involved is potentially huge. As we get closer to a conclusion of this review, the focus of the work involved is likely to switch from legal arguments to accounting analysis.
3. The FCA is saying (mostly) the right things about impacts on the market and consumers
The FCA went far further yesterday than it has before in setting the need for any interventions in the context of promoting a competitive market and good customer outcomes.
The Statement itself only referred in passing to the need for the market to continue to work well, with effective competition. But Nikhil Rathi went further on the podcast and market analysts call, saying:
When deciding what action to take, the FCA will have to consider its objectives, including the impact on the market now and in the future, and the need to protect consumers and ensure competition.
The FCA will be thinking about how to ensure any action it takes supports the continued supply of motor finance to millions of consumers who depend on it.
Any interventions will be subject to consultation and advice from the FCA's new Cost Benefit Analysis Panel.
One participant on the call noted that since the ban on DCAs, prices in the market have not fallen. This is probably an understatement, as my analysis for Apex Insight (see chart below) shows that in recent years, the share of total finance provided by low cost providers (those charging average APRs of up to 10% in February 2024) has fallen, with ‘medium cost’ providers (10% to 30%) and ‘high cost’ providers (rates over 30%) growing.
Market is shifting away from lower cost providers
Source: Apex Insight
Prime lenders have been pulling back and many consumers that previously were able to access prime rates are now paying more. And higher cost lenders tended to use fixed commission rates (often set at a level well above the maximum available using a DCA at a lower cost lender) so they are not exposed to any potential redress arrangements.
Nikhil Rathi said it was too early to give a conclusive view on this, but that the FCA will be thinking about the level of harm there has been alongside its wider objectives.
So what can we expect?
As I set out in my earlier article, instead of a blanket redress scheme for all DCA cases, I expect we will see FCA and FOS eventually publish new guidance on how to assess DCA complaints.
Some redress may well be required, but it should be limited to a minority of agreements, and possibly only a small minority, where DCA was used and there is evidence of unfair pricing.
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