FCA launches probe into historic commission agreements by motor finance groups

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The UK’s top financial regulator has launched an investigation into historical commission agreements offered by motor finance companies following a surge in customer compensation claims.

In 2021, the Financial Conduct Authority banned discretionary commission arrangements that it said gave car finance brokers and dealers an incentive to raise interest rates on customer loans.

The regulator said on Thursday in a statement that it would review how “several firms” had applied commissions before the ban, after a high number of customer compensation claims for agreements from before it came into effect.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement,” the FCA said.

“If necessary, resolve any contested legal issues of general importance,” it added.  

The regulator noted that a “high number” of complaints had been rejected by motor finance groups that “consider that they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements”. 

The investigation follows two rulings in favour of consumers by the Financial Ombudsman Service, an official body that settles disputes between companies and their customers. The FCA said the cases were likely to prompt “a significant increase” in claims.

One of the upheld complaints was over a 2016 agreement with Black Horse, a subsidiary of Lloyds Banking Group and the UK’s largest car finance lender. The other was made against Barclays Partner Finance, a division of Barclays bank.

A Barclays spokesperson said: “We are working with the Financial Ombudsman Service and FCA to resolve historic complaints relating to these types of loans”

“Any customers that are unhappy with the circumstances of their car financing loan should get in touch with Barclays Partner Finance directly so that we can investigate and, where necessary, put things right,” they said.

Black Horse were contacted for comment.

Through discretionary commission arrangements, which link the commission a broker receives to the rate of interest, some lenders allowed brokers and car dealers to raise their charges.

Kate Robinson, principal at regulatory consultancy Avyse Partners, said she expected complaints management companies to “go absolutely wild”. “It will be like the [payment protection insurance (PPI) scandal],” she added.

The PPI scandal dates back to the 1990s when banks mis-sold a type of insurance product to millions of customers, even those who were not eligible for payouts or who were not aware they were buying it. Banks were later hit with billions of pounds worth of fines and compensation claims.

The FCA on Thursday asked motor finance providers to pause their handling of complaints for approximately nine months while it investigates the matter.

“It’s very pleasing to finally see the FCA bearing some of its regulatory teeth for a change,” said Simon Evans, head of the Consumer Redress Association, a trade body for claims management companies. “This isn’t a system that’s working in the way it should be working.”

The FCA said customers who had used car finance including personal contract purchases before January 28 2021 could be affected and have grounds to file a complaint.