Comment on DCA Cases by Broadstone
UK Motor Finance Industry to Implement FCA's Redress Scheme for Hidden Commissions
The Financial Conduct Authority (FCA) is set to implement a redress scheme designed to compensate consumers who were treated unfairly due to undisclosed or excessive commission payments by lenders to car dealers acting as brokers. The scheme, which will be operational in 2026, follows an FCA consultation starting in October 2025.
The primary focus of the scheme will be on commissions paid under "discretionary commission arrangements" where proper disclosure to customers was lacking. However, it may also cover other unfair cases, such as those involving very high commissions, even if not strictly discretionary. The FCA's upcoming consultation will address key issues such as whether to extend the scheme to non-discretionary commission arrangements from 2007 to 2021, how to identify unfair arrangements, and how to calculate redress payments—including potential interest at around 3% per annum.
The FCA will determine if a case is "unfair" through an individualised, fact-sensitive assessment, considering factors such as the level and nature of commission paid, the extent and adequacy of disclosure to the customer, whether the commission arrangement caused detriment to the consumer, and the specific contractual and commercial relationship between lender, broker, and consumer.
Many commissions will not fall under the scheme due to the lack of fiduciary duty and "commercial interest" in dealer-broker roles, limiting eligibility. However, the scope of cases and claims is expected to be significant, with the FCA estimating potential redress liabilities between £9 billion and £18 billion across affected lenders.
Finance companies will still need to review all of their DCA cases, assess whether they are unfair, and calculate potential redress. This exercise is expected to be significant for finance companies, and Brian Nimmo, Head of Redress at Broadstone, has commented on the hidden commissions issue in motor finance.
Meanwhile, Broadstone has been preparing models to help lenders with this issue and has published a DB Redress Tracker update, focusing on compensation levels for those who were ill-advised to transfer from DB pension schemes in the past.
It's worth noting that the FCA has not yet provided details on how the redress scheme will be structured. DCA (Debt Collection Agency) cases will still need to be reviewed on a case-by-case basis. The extension of the deadline for motor finance complaints is significant for firms in the Motor finance sector, with the FCA having recently extended the deadline for motor finance firms to provide a final response to customer complaints regarding discretionary commission arrangements (DCAs) until 4 December 2025.
In a related development, the new Labour government is expected to seek to amend, or cap the level of interest on things like EV car leasing in the near future, according to an opinion in the "Insurance Regulation" section. This potential future change could significantly impact the motor finance industry. The FCA's ruling on motor finance complaints is considered a partial win for the motor finance industry.
In summary, the FCA's redress scheme for hidden commission cases in the UK motor finance industry is a significant development that will require careful review and assessment by finance companies. Consumers may be eligible for redress if their financing arrangements involved undisclosed, unfairly high commissions, per the FCA’s forthcoming rules.
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