Reflecting on the results, Jonathan Davidson, Executive Director of Supervision, Retail and Authorisations at the FCA, criticised commission structures: “Some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission pay-outs for themselves… This is unacceptable and we will act to address harm caused by this business model.”
Davidson also chastised the sector for its lack of attention to assessing and informing customers of risk, saying he had concerns “firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations.”
Following the report the FCA now intends to both follow-up with individual lenders/brokers and assess the options for intervention in respect of commission arrangements. This consultation is proposing to ban commission models that incentivise increasing a customer's interest rate, and considers amending the rules and guidance on the disclosure of commission arrangements; moves that could profoundly reshape the sector.
Complaints corroborate results
There’s already evidence to support the FCA’s actions. Customer complaints are up sharply in relation to car finance, with the BBC reporting there were 5,805 complaints escalated to the Financial Ombudsman Service (FOS) in 2017-18 which rose to 8,943 in 2018-2019: an increase of 54%. Complaints included customers not knowing what type of finance package they were on to being sold finance plans they couldn’t afford.
The FCA continues to recognise complaints as a key indicator of a firm’s failings in respect to its internal systems and controls, its products and customer outcomes. A failing in any one of these areas can see punitive action taken against the firm by the regulator as well as further scrutiny of the consumer credit marketplace. But what of the complaint handling process itself? This, too, is often found wanting.
In 2014 the FCA reviewed the complaint handling activities of 15 Consumer Credit firms. It’s findings saw a consultation paper issued in the same year followed by a Policy Statement in July 2015 and a Dear CEO letter in September 2017. This voiced concerns over the:
- Failure to provide complainants with FOS details
- Failure to provide complainants with clear information regarding the outcome of the complaint and why the outcome had been reached
- Lack of management controls in relation to root cause analysis activity
- Poor quality of Final Response letters
- Accuracy of data
Costs and consequences
How firms manage complaints continues to be a major focus for the FCA and the increase in complaints in the motor finance industry may well see it become more a bane for the industry, leading to the prospect of large penalties. For example, Liberty Mutual Insurance was fined £5.2 million in October 2018 and criticised for mis-selling insurance and poor complaints handling practices.
Such cases can see firms required to undertake remedial action and/or customer redress by the FCA, particularly if the company has failed in its obligations to assess credit worthiness and affordability. Dollar, Wonga, Perfect Home, BrightHouse, HSBC and Mortgage Matters Partnership have all recently been compelled to embark upon redress programs which have then attracted further attention from concerned customers and Claims Management Companies, leading to spiralling costs. Whilst these firms do not do motor finance, it demonstrates how even when firms are working to more stringent affordability criteria, than the Motor Sector, affordability is not always easy to prove.
Not sure where to focus improvements? Revisit the affordability criteria used on customers who have fallen into arrears, what trends and patterns are there, how could you improve? Then use your complaints data to identify failings in processes. Identify and rectify problems with complaints root cause analysis used to recognise patterns, revise products and adjust procedures. If the industry fails to self-regulate in this way, it is likely to see complaints and scrutiny increase, potentially leading to costly fines and redress.