What could investigations into mis-sold car finance mean for lenders and borrowers?
In this article, we look at the potential consequences of the Financial Conduct Authority (“FCA”) investigation into mis-sold car finance under the Discretionary Commission Arrangements (“DCAs”), and the potential implications for both lenders and borrowers.
Background
A DCA is where a lender allows a dealer or broker to select the interest rate charged to the consumer. In turn, the interest rate charged to the consumer is reflected in the amount of commission paid to the dealer or broker. Banning DCAs in 2021, the FCA removed the incentive for brokers to increase the interest rate that a consumer pays for their motor finance. Since then, there has been a continued rise in the number of complaints from consumers involved in arrangements with motor finance providers which had DCAs in place prior to the ban.
Launching an enquiry in January 2024, the FCA has announced it will be reviewing the historic use of DCAs in the motor finance market to determine whether consumers require financial redress due to such use. The FCA has also declared a pause to the eight-week time limit for motor finance firms to provide their responses to DCA complaints and allowed consumers a prolonged timeframe (from six months to 15 months) to escalate their complaints to the Financial Ombudsman Service. Despite varying degrees of speculation surrounding the outcome of the FCA investigation, it is yet to be seen how this investigation will affect both lenders and borrowers.
Potential consequences for lenders
The FCA’s powers are wide-reaching and as such the FCA has the ability to issue fines, carry out public censures, and request information from firms. A senior Bank of England official has commented that the FCA’s investigation could have “significant financial ramifications” for lenders. With the range of possible outcomes quite wide, including potentially substantial fines and payouts for claims, the firms investigated under the enquiry are likely preparing themselves for such redress. Although yet to be seen how significant the financial impact on those firms will be, it could lead to negative effects on liquidity and, in turn, negative effects on the stability of the car finance industry as a whole.
Further, as with any sector-focused investigation, there is the concern that the investigation into car finance schemes may prompt commission complaints in other sectors, leaving the floodgates open for further consumer finance investigations down the line.
Potential consequences for borrowers
As awareness of the investigation increases, we may see more uncertainty in the motor finance industry as consumers and investors alike are put off by the unknown. Combined with potential ill trust from consumers following the investigation, we could see a decline in the availability in car motor finance schemes, forcing consumers to look elsewhere. As the market for second-hand cars is already struggling since the pandemic in terms of increasing prices and shortage in availability, such struggles may persist and increase as more people are driven towards purchasing privately or through motor auctions.
Although the impact on motor finance firms and lenders is yet to be seen, both consumers and lenders affected by the investigation into DCA schemes will be waiting patiently for the outcome and it is likely uncertainty and concern will rise over the coming months.
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