Motor Finance Discretionary Commission Arrangements (DCA’s) – No time to stand still.

The FCA’s decision to postpone its next steps by a further 10 months¹, while potentially perceived as additional time, is not a grace period. Instead, it represents a critical window of opportunity for firms to prepare for any potential programme of remediation. Building on some of the actions outlined in our previous blog², this blog outlines some additional priority actions that firms should take now to prepare for the FCA’s anticipated conclusions in May 2025.

Current Position:

Whilst the FCA has not yet reached any definitive conclusions on whether there has been widespread misconduct and whether customers have suffered harm as a result of historic DCA’s, there has been some notable updates in the market, namely: 

• The FCA has pro-actively engaged firms as it continues its diagnostic work either through the submission of information requests³ and/or reminding firms of the importance of maintaining adequate financial resources to support any potential remediation that may be due⁴ . The PRA has also echoed this messaging from the FCA, with a number of firms receiving information requests emphasising the need for them to robustly challenge their assumptions and consider the full range of stress outcomes related to Motor Finance commission arrangements.
  
• Since the FCA’s announcements, firms have also experienced an increase in court claims in this area. Whilst these legal claims have predominantly been made through the County Courts, decisions are also awaited from the Court of Appeal on three test cases ⁵ alongside the outcome of the Barclays initiated Judicial review⁶ with a hearing due to take place in October 2024⁷.

More recently, the FCA provided an update on its diagnostic work confirming that the regulator is not yet in a position to conclude on its review and announce next steps. The FCA confirmed that this is due to delays experienced in obtaining data from firms to complete its review combined with the awaited outcome of key legal claims. As a result, the FCA’s conclusions and next steps are now expected in May 2025 with the FCA extending the pause on DCA complaint handling and resolution until 04 December 2025⁸ to provide the regulator with sufficient time to consult on any possible redress intervention. 

What does this mean for firms?

The recent updates from the FCA do not provide a clear direction of travel or conclusion on their work to date but instead extends the status quo. Whilst the FCA has not yet concluded on the type and scale of any potential redress intervention, the regulator has stated that “… it’s more likely now than when we started this work that some kind of structured redress mechanism may be necessary”⁹. 

At this stage, it is not possible to predict how far on a scale of likelihood the dial has moved on since the FCA commenced their review. However, given the rigour of activity that the FCA has been taking on this topic combined with the awaited adjudication of legal claims it is imperative that firms continue to take pragmatic steps now to ensure they are well prepared, both operationally and financially for any possible remediation activity.

What key actions should firms be taking now? 
 

The FCA’s recent updates move back the timeline for their conclusions to May 2025 and extends the pause until December 2025, which would give more time for firms to prepare. However, the FCA has stated that it could lift the pause on DCA complaints and/or announce its next steps sooner if it is able to do so¹⁰. In light of this and as firms continue to take steps to understand and assess their historic exposure in this area, there are some further priority actions that firms should consider now.

We have summarised below the key actions that firms should be taking now.

1. Data Availability and Quality
 

A key challenge that firms have faced in progressing their exposure assessment in relation to historic DCAs has been the availability and quality of data over the relevant period. There are several consistent data gaps we have seen through our work which include data relating to APRs, rate cards used, rate for risk, information relating to how the commission structure was disclosed to the customer and the overall structure of the deal. 

The availability and accuracy of these quantitative and qualitative data points will be critical in supporting firms to successfully identify the potentially impacted population and the data required to calculate redress where needed. In light of this, firms should ensure that they can demonstrate that they have taken all reasonable steps to obtain and extract data, validating true gaps in data and considering how these gaps will be addressed. Key (non-exhaustive) actions for firms include: 

• Engaging with the firm’s broker/dealer networks to determine what data can be obtained and over what time period. Engaging with the firm’s larger broker/dealers through a risk-based approach may be a sensible starting point.
• Review resource availability and capability within the firm’s data team to ensure that the team is sufficiently equipped to analyse and manipulate different types of data into meaningful outputs that can be utilised for any potential programme of remediation. 
• Develop a data platform/repository to structure and house the collated data, given the source data is likely to be both structured and unstructured. Some firms may already have in place processes for managing data for remediation, however thought should be given as to the volume of data, type of data and use cases for data. 
• Review technology tools and processes required to carry out data analysis, extraction and restoration. 
• Review of the high-level end to end data flow. Firms should consider how the sourced and prepared data is utilised in their end-to-end remediation, considering options where remediation can be fulfilled via automated routes versus operational review.

2. Scenario Analysis
 

Once firms have taken reasonable steps to extract all necessary data available, it will be key for firms to analyse and evaluate this data into potential remediation scenarios. This activity will support Boards in understanding the potential financial exposure, which will be important to a firm’s shareholders, and the firm’s auditors. Whilst at this stage, the outcome remains unclear, in undertaking scenarios analysis activity it will be prudent for firms to be cognisant of regulatory requirements, expectations and FOS decisions that are currently available to ensure that any scenarios reached are plausible and highlight possible eventualities that may crystallise as part of the FCA’s conclusions. 

3. Financial Preparation
 

The PRA and FCA continue to stress to firms the importance of maintaining adequate financial resources¹¹. In light of this and in preparation for any potential remediation activity, firms should consider: 

• The potential financial implications of remediation and redress as part of stress testing and reverse stress testing. This should consider the impact on capital and liquidity in severe but plausible scenarios, and the ability of the firm to maintain its regulatory minima alongside meeting its lending targets.
• Firms should consider what options it has available to raise capital in scenarios where its capital position has weakened. Forward planning will make any subsequent recovery actions easier to take, especially as some options (e.g. significant risk transfer transactions) can take a significant time to arrange. 

4. Planning for Remediation and handling DCA complaints – Success Measures 
 

It will be critical for firms to ensure they have embedded skilled resources, case management systems, process and decision-making tools to execute any potential remediation programme and to manage any backlog of DCA complaints. Without this, firms face the risk of delivering poor outcomes, double handling cases, and missing the opportunity to build in control and efficiencies in their processes. It is important for firms to be on the front foot, planning for their response and considering the activities, resources and skill set required to execute a fair process with a customer focus in the following areas: 

• Strong governance over the programme: firms should ensure that they have clear lines of governance with executive level accountability and robust oversight over any potential programme of remediation to strategically steer the work required in a controlled, timely and effective manner. 
• Complaint handling resources: the combination of resource required will range from operational capabilities to triage and record incoming DCA complaints through to managing complaints for customers that have already complained in order to keep them adequately informed, responding to information requests from the FOS and managing the backlog of complaints volumes once any pause is lifted. In considering resource capabilities, firms need to be confident that front line teams are skilled in managing customer interactions and identifying where a customer requires additional support. 
• System led activity: automation will be a critical tool to drive consistency, reduce operational headcount and programme costs. Utilising workflow systems which can be easily configured once the FCA announces its approach will support operations to hold all the data in one repository with clear and reportable audit trails. 
• Legal expertise: firms across the market have experienced significant increases in s140 claims directly from Claim’s Management Companies alleging that the operation and existence of a DCA had caused an unfair relationship between the customer, lender and broker. Whilst these claims are outside of the scope of the FCA’s review due to being legal claims, this means that firms need to respond to these claims and in doing so ensure that they have the right level of resources and specialist capabilities to manage these claims, given they are complex in nature.
• Right first-time approach: achieving this will require customer focused, considered and comprehensive policies and procedures drafted, tested and operationally ready to support a controlled ramp up of activity once the FCA’s pause is lifted. 
• Customer focus and support: implementation of the solution that the FCA reaches will need effective prioritisation of the relevant impacted population, making sure that customers with vulnerabilities are supported through the process and have complaints dealt with early on where appropriate. Customers will also need to be guided through their outcome with clear communications that provide them with comfort that their claim or complaint has been dealt with fairly. The FCA’s finalised guidance on Consumer Duty¹² is clear on the expectation for firms to monitor metrics that can help them evidence that they are delivering good customer outcomes through the complaints and redress process.
   

Next steps and how can Deloitte Help?
 

Whilst the extension to the FCA timeline has provided a potential further 10-months until firms can expect a formal update and conclusion on next steps, it will be important for firms to use this additional time to assess the impact on their own portfolio and take reasonable steps (as outlined in this blog) to sufficiently prepare and be on the front foot of any potential remediation programme.

Deloitte can help firms affected, offering a multi-disciplinary service through our dedicated and highly experienced teams which provide regulatory, data, legal and managed solutions capabilities to help you navigate through your required activities in this area. If you would like to discuss in further detail any of the actions outlined in this blog, then please reach out to any of the contacts below.

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References

¹Extension to motor finance complaint handling pause confirmed | FCA

² Motor Finance DCAs | Deloitte UK 

³ Utilising the FCA’s powers under S165 Financial Services and Markets Act 2000 

⁴ Dear CEO letter: Maintaining adequate financial resources (fca.org.uk)

⁵ Motor finance test cases against Close Brothers and Firstrand head to Court of Appeal (cityam.com)

⁶ Barclays mounts legal challenge over car finance claim | Business News | Sky News

⁷ Extension to motor finance complaint handling pause confirmed | FCA 

⁸ PS24/11: Extending the temporary changes to handling rules for motor finance complaints (fca.org.uk) 

⁹ Inside FCA Podcast: Nikhil Rathi on reviewing the motor finance market | FCA

¹⁰ Update on motor finance work | FCA

¹¹ Dear CEO letter: Maintaining adequate financial resources (fca.org.uk) 

¹² FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (fca.org.uk)