Size and scale of potential claims
The FCA’s Executive Director of Consumers and Competition, Sheldon Mills, has said that 75% of the motor finance agreements between 2007 and 2021 would have involved some form of discretionary commission model (albeit that not all consumers would be entitled to compensation). Early estimates from industry professionals have placed the cost to the industry at between £6bn and £16bn.
For the larger players in the market, that means significant provisions: in its annual results in February, Lloyds Banking Group made a £450m provision for potential pay-outs, with RBC analysts suggesting it could face £2bn of claims. For the smaller players, this may represent a threat to their solvency.
In April this year, the FCA wrote to firms reminding them of the requirement that they maintain adequate financial resources. In particular, the FCA stated that with immediate effect, firms were expected to undertake an assessment of their financial resources to consider whether they are adequate. It advised that the assessment should be forward looking and must consider the risks, and potential liabilities, that firms are exposed to, including any potential redress liabilities that may arise from historic use of DCA arrangements. Although much remains uncertain as the FCA’s review work is ongoing, firms must take heed of these warnings.
Motor finance firms’ data delivery
Given that the FCA’s review work considers DCAs from 2007 onwards, as with its work on PPI, issues with available data present a very real (but unsurprising) challenge. In April, the FCA issued a statement on its progress with the review in which it cited the struggles of many firms to provide the data it needs within a sensible time-frame and, in other cases, noted that some relevant records had not been retained. This was due to a number of factors, including data being stored across multiple systems and firms having already destroyed relevant records. While the FCA has confirmed that it now has the data it needs, no doubt these issues will also present difficulties across the industry in future, as more and more claims and complaints are received.
If you would like to feel better prepared for what the FCA review holds, or believe this review presents a potential issue for your business, please contact Rachel McDonnell or Simon Garbett for more information.