FCA motor finance review drives up official complaints

A review by the City regulator into now-banned commission arrangements on car loans has contributed to a surge in official complaints to the UK’s financial ombudsman in recent months.

Complaints about financial products jumped by around 70 per cent between April and June 2024 compared to the same period last year, according to figures from the Financial Ombudsman Service (FOS).

Of the 74,645 cases raised by consumers, credit cards were the most cited product with 18,175 complaints – mostly related to “perceived irresponsible and unaffordable lending”.

Hire purchase (motor) was the second most complained about category, with 15,925 cases. Of these, around three-quarters related to motor finance commission.

The issue has gained widespread attention after the Financial Conduct Authority (FCA) announced in January that it would review “unfair” discretionary commission arrangements (DCAs) on car loans between 2007 and 2021.

A DCA was an agreement between a lender and car dealers or brokers, which enabled the latter to determine interest rates on car repayment plans within a range decided by the lender.

They were industry standard until the regulator banned them in January 2021, after finding the practice cost customers £300m more per year than the flat-fee models lenders use now.

Analysts have estimated that the FCA’s probe could leave the motor finance industry on the hook for up to £16bn in compensation fees. Lloyds, which owns the UK’s largest auto lender Black Horse, made a £450m provision in February to cover potential costs tied to the review.

The FOS said more than 90 per cent of motor finance commission complaints between April and June were brought by claims management firms and other professional representatives. They also made up more than half of credit card complaints.

These groups have come under fire in recent years as the FOS has found that some submit mass claims without determining whether they have merit, while others fail to respond to requests for evidence.

Senior bankers have told City A.M. that many lenders are seeing a spike in complaints over car finance and associated administration costs, even if they never used DCAs.

The FOS flagged that professional representatives now account for around half of the complaints it receives, up from just 17 per cent a year ago.

It added that over the three months, around a quarter of professional representatives’ claims were upheld, compared to 40 per cent of those brought directly by consumers.

In May, the FOS proposed a £250 fee for professional representatives to lodge a case, reduced to £75 if the outcome favours the consumer. It plans to provide an update on the topic in the coming months.

“Whilst professional representatives have an important role to play, they must ensure that their cases are well evidenced and have merit,” said Abby Thomas, the FOS’ chief executive.

“If consumers have a dispute with their bank or finance provider they can come directly to our easy-to-use service for free and we will see if we can help”.

The Finance and Leasing Association, which represents the motor finance industry, has said dealers often used DCAs to lower interest rates to secure deals in a competitive market.

A spokesperson for banking trade body UK Finance said credit card firms “must comply with strict regulatory rules to assess whether lending is affordable and they also provide a wide range of support to anyone concerned about their finances or repayments”.

They added that the group supports a case fee for claims from professional representatives, “which could help prevent high volumes of speculative complaints if set at the right level”.