FCA Alerts Banks Re Costs Caused by Mis-Sold Car Finance Claims

The Financial Conduct Authority (FCA), the UK’s regulatory watchdog, warned lending institutions about the potentially significant impact of its ongoing investigations into the purported malpractice in the motor finance industry. Experts say that car finance claims could fall within the £6 billion to £16 billion ballpark. 

This warning came after authorities received consumer complaints related to the said sector, highlighting the role of banks in handling motor financial agreements and addressing these claims. The watchdog also noted the need to make room for financial burdens caused by the probe.

Car finance claims affect lenders, consumers

In 2021, the regulator issued a ban on discretionary commission agreements (DCAs), a practice that consumers perceived as a harmful move and one that violated the firms’ fiduciary duties. DCAs have been noted as the primary incentive for dealers who resort to effecting higher interest rates and fees on consumers’ motor loans.

The watchdog’s actions are part of its attempt to minimize lending policies perceived as unfair by consumers, leading to a spike in major compensation claims from clients who felt victimized by soaring costs associated with the aforementioned commissions before the ban. 

The FCA’s warning is expected to bring in a new wave of complaints from clients who remain doubtful about their car lending agreements with dealers. This is exacerbated by the decisions by the Financial Ombudsman Service (FOS) favoring consumers, which came before the FCA’s announcement and are suspected to be the catalyst for the surge in reports. 

Consumers intending to file car finance claims with their ombudsman are urged to do so within the given timeframe, which has been extended from the standard 6-month provision. 

Major players have announced economic measures in preparation for potential liabilities amounting to billions. Lloyds Banking Group and Close Brothers have set aside substantial amounts for compensation and claims costs, earmarking £450 million and £400 million, respectively. 

Barclays, however, appealed for a review of one of the two cases handled by the FOS, in which the agency ruled in favor of the consumer. Nevertheless, the FCA has noted that the firm has been cooperative in the probe, as opposed to some players who are yet to provide sufficient data. 

This move is set to be a regulatory game-changer as it can affect future measures, especially as it may be a precedent for how similar cases would be addressed in the motor lending market. 

Market players disagree with claims

The Financial Ombudsman Service (FOS) was reported to have received 17,000 complaints in April and the number continues to rise as the year progresses, indicating the gravity of the situation. 

Predictably, major car brokerage firms raised alarms against these complaints, arguing that their policies have always been in line with regulations set by the FCA. Investigations are underway as the regulator evaluates DCA’s impact on loan costs with particular attention to how these commission agreements have resulted in inflated rates and fees, as well as the culpability of dealers and lenders who participate in these practices.

Aside from the ongoing assessment, the FCA has also expressed its intent to keep track of lending institutions’ resources, particularly as it pertains to their capacity to support car finance claims. Interventions are reported to be an option should banks fail to reserve enough capital for redresses and compensations. 

Moreover, the watchdog also tapped into its legal power as a regulator under the Financial Services and Markets Act 2000, Section 166. Through this mandate, FCA is set to review historical DCAs done by multiple firms in the motor finance segment. 

Capital reductions to negatively impact compensation funds – FCA

As lending institutions prepare for potential liabilities, the FCA also reminded firms to expect that capital reductions could affect their ability to funnel funds toward said charges. Furthermore, the regulator cautioned against prioritizing shareholder returns over the stability of capital reserves for compensation and claims payment. 

Capital reductions could include dividend distributions, paybacks, and share cancellations. The FCA has set a timeline to update the sector on the subsequent steps it plans to take. The update, which is expected to fall in May 2025, will cover the agency’s findings from data provided by financial institutions. It is also predicted to include the FCA’s recommendations following the judicial review filed by Barclays. 

Additionally, the regulatory body is looking into providing formal consultations to create a redress plan, giving affected consumers a more systematic way to receive compensation. This move is expected to standardize the complaints handling process. It is also projected to open up communication lines for customers with similar concerns to report. 

Banks and other lending institutions are advised to remain steadfast, yet adaptable as the financial market and the regulations it navigates continue to evolve. 

Appeals Court ruling supports FCA efforts

As of this writing, the Court of Appeal has released its ruling on the three landmark cases involving MotoNovo and Close Brothers. The court, which tackles car finance claims against the aforementioned firms, upheld the complainants’ assertions. 

The consolidated cases are another game-changing milestone, indicating that car dealers are obligated to disclose any DCAs with lenders and should obtain informed consent from their clients. This decision is also forecasted to have a long-term impact on regulatory measures moving forward, as well as the FCA’s continuing review of historic commission agreements, particularly as it pertains to transparency and accountability within the car finance market. 

Consumers who suspect they have been mis-sold products by their dealers  are advised to stay informed about their rights and consider getting professional consultations to evaluate their options.