Between 2017 and 2019 the FCA reviewed commission arrangements in the motor finance market, and particularly DCAs - where the commission received by brokers was linked to the interest rate of the finance agreement. Due to their concerns of customer harm over the use of DCAs, the FCA subsequently banned such arrangements in 2021. Following the ban, there was a significant uptick in the volume of complaints to firms about DCAs, something that the FCA has projected to increase further.
Historically, firms have rejected these complaints in masse as they disagree that DCAs have caused consumer loss or that they have acted unfairly. In response to these complaints being rejected, many are referred to the Financial Ombudsman Service (FOS). FOS has now issued their first decision upholding a previously rejected DCA complaint - something which is expected to trigger an increase in the number of DCA complaints.
The FCA is now carrying out diagnostic work under PS24/1 to determine whether firms do in fact owe redress to customers due to their historical use of DCAs. This will include a review of practices within individual firms to see how practices arising from incentives linked to DCAs have affected their customers. This diagnostic work will look to identify:
- Whether there has likely been a widespread failure to comply with relevant requirements and whether any such failure has caused financial loss to consumers;
- In the event of widespread failure, how many customers could potentially be owed redress, as well as any amount of redress that could potentially be owed;
- Whether the FCA needs to take action so to ensure consumers are provided redress in an appropriate manner; and
- Whether the FCA needs to take additional steps in support of FOS carrying out its own statutory function in the face of the volume of complaints it could potentially receive.
The FCA's expectation is that complaints regarding DCAs will increase, that these complaints will be rejected by firms and in turn they will be referred to FOS. With this in mind, the FCA will seek to break this cycle in the short term. This is to be done through introducing a pause on the requirement for firms to respond to DCA complaints and give complainants the right to refer to the Financial Ombudsman within 8 weeks. This pause will apply to all DCA complaints submitted to firms on or after 11 January 2024, and also to DCA complaints that have not been closed by the firm and are less than 8 weeks old on 11 January 2024. This pause will run for 37 weeks and will run alongside an extension of the time limit of 6 months to 15 months for complainants to refer DCA complaints to FOS.
The pause will end on 25 September 2024, and in the meantime, firms are encouraged by the FCA to continue to progress DCA complaints where they can. They are also required to keep complainants informed about the changes to the complaint handling timeline. The FCA then plans to communicate its decision on the next steps by 24 September 2024 at the latest - including any consultations or potential extension of the pause and further changes to complaint handling rules.
The FCA has also sought feedback from stakeholders on the impact of the rules and their approach to providing redress for harm caused by DCAs - with the deadline for feedback being set for 11 March 2024.
