The motor finance industry is facing a challenging 2025

The relief in Board rooms was palpable as the Supreme Court issued a brief statement that it will hear appeals to the Court of Appeal Judgements in the cases of Wrench, Johnson and Hopcraft. The hope is that the Supreme Court will provide certainty over the duties owed to customers by brokers and lenders.

In this article we explore the status of motor finance complaints.
 

Discover how we can help you manage the impact of motor finance DCAs
 

What is the latest on discretionary commission arrangement complaints

However, there is still the issue of discretionary commission arrangement (DCA) complaints to be resolved. These are cases where the broker had discretion over the interest charged by the lender, that in turn could increase the level of commission the broker received. The FCA banned DCA commissions from January 2021 after completing a market study where it found these types of commission arrangements were unfair. The FCA estimates there are around 335,000 such complaints although some commentators believe it is more.

FCA senior officials have commented that a review process for DCA complaints is now more rather than less likely. The FCA would consult on how a review should progress with two main options. A complaint-led approach where consumers ‘opt in’ to a review by making a complaint, which would be similar to the approach used for PPI; or an industry wide process where all motor finance consumers sold finance via a DCA are included in a review unless they opt out (e.g. the approach used for British Steel Pension transfers).

The FCA has paused complaint handling deadlines for DCA complaints, now likely to be after the Supreme Court process has concluded. The expectation is that motor finance lenders should be taking a number of steps now in anticipation of a potential review of DCA motor finance complaints. These steps include progressing complaints to a point where a decision can be made; dealing with customer enquiries; preparing for a potential review; and assessing potential liabilities and making any appropriate disclosures.
 

What is the latest on non-discretionary commission complaints

The Court of Appeal Judgement in Wrench, Johnson and Hopcraft has opened the door to a wider number of complaints about fixed or non-discretionary commissions that were only partially disclosed to the customer or not disclosed at all (hidden or secret commissions). The issues all stem from the relationships and duties owed to the customer by the broker and lender.

The FCA requirements for disclosure were not as prescriptive as those determined by the Court of Appeal. It is now a complex position where regulation, industry practice and common law are not aligned.

The FCA has recognised this could significantly increase the numbers of consumer complaints lodged with motor finance lenders and brokers and overwhelm the Financial Ombudsman Service. Therefore, the FCA is consulting on a pause to complaint handling for these complaints, likely until after the Supreme Court judgement.

The implications of this potential wave of complaints are more serious and is potentially a significant liability for motor finance lenders and brokers. Operationally, the FCA expects firms to put in place capacity and capability to handle an influx of additional complaints. Given the scale of the task, technology and AI solutions are likely to be needed. Firms may also wish to consider the financial implications and strategies for addressing the potential scenarios from the judgements.

Outside of motor finance, the Court of Appeal judgements could apply more widely. It may be prudent for brokers and lenders to consider how commission is disclosed to consumers and revisit consumer journeys. During 2025, firms may start to consider the scenarios and the potential extent of any exposures.

The Supreme Court has said the appeals will be heard in the Hilary Term, between 20 January and 28 March 2025. A judgement will be handed down after the conclusion of the appeals at a later date, hopefully sometime in the early summer or late spring.
 

Three key take outs from the FCA’s recent communications:

Firms should anticipate a new influx of complaints about fixed/non DCA commission motor finance lending.

This means being ready to receive additional complaints and carry out capacity planning to gear up operationally. Customers who have had a complaint rejected by a firm, because it was not a DCA complaint, can now complain again because of the judgement. Therefore, steps such as updating websites and communications should help consumers find information they need. Importantly, the FCA sets out its expectation that “Firms will need to use the additional time provided to ensure they have the resources to investigate and issue final responses to complaints at the end of the proposed extension.” This means getting on with the processing of data gathering and investigations now and being able to issue a decision once the court actions conclude. This is potentially complicated as firms may need to run investigations with parallel decision-making outcomes anticipating potential conclusions from the courts.

Firms should be meeting the common law standards as well as FCA’s own rules and guidance on a current and forward basis.

This means checking current processes and procedures meet the standards of disclosure and consent outlined in the judgement for all motor finance – that is, clearly disclosing the commission and how it is calculated to the customer and obtaining consent. There is still an outstanding question about applying the Court of Appeal judgement to a wider suite of products, many firms may well be looking at this with their legal teams.

Financial impacts

Firms should be calculating provisions and ensure they have sufficient financial resources to meet threshold conditions. A useful approach is to use scenarios and assumptions to calculate potential redress liabilities. All provisions should meet relevant accounting standards and will be bespoke to each firm. Separately, regulatory capital should ensure specific regulatory capital standards are met as well as sufficient financial resources retained to operate. Wind down plans should be adjusted to consider potential scenarios.
 

How we can help

If you need support in preparing for the impact of DCAs we can help. We have expertise is quantifying exposure, regulatory conduct, complaints management, resource augmentation and restructuring. To discuss the issues you are facing please contact Richard Barnwell.