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The U.K.’s top financial regulator, the Financial Conduct Authority (FCA), has initiated an inquiry into historical commission agreements by car dealers, a move that could result in over GBP 1 billion (USD 1.27 bn) in compensation payouts for British auto lenders. The investigation focuses on interest-linked deals offered by motor finance companies, prompted by a surge in customer claims. The FCA banned discretionary commission arrangements in 2021, expressing concerns that they provided car finance brokers and dealers with an incentive to increase interest rates on customer loans.
On Thursday, the regulator stated 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.
The Financial Conduct Authority (FCA) emphasized its commitment, saying, “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 added, “And if necessary, resolve any contested legal issues of general importance.”
The FCA’s ban in 2021 was projected to save consumers approximately GBP 165 million (USD 210 mn) annually. If this figure represents the likely annual compensation, the total industry bill could reach about GBP 1.3 billion (USD 1.6bn). The FCA, overseeing the motor finance sector since 2014, initiated the inquiry following two favorable rulings by the Financial Ombudsman Service, prompting an anticipated increase in claims.
Notably, one upheld complaint involved a 2016 agreement with Black Horse, a subsidiary of Lloyds Banking Group, the U.K.’s largest car finance lender. Another complaint was made against Barclays Partner Finance, a division of Barclays bank. Both entities are collaborating with the FCA and the Financial Ombudsman Service to address historic complaints related to these loans.
Kate Robinson, principal at regulatory consultancy Avyse Partners, anticipates a surge in activity from complaints management companies, likening it to the Payment Protection Insurance (PPI) scandal. The FCA has requested motor finance providers to temporarily halt complaint handling for about nine months during the investigation.
Simon Evans, head of the Consumer Redress Association, views the FCA’s actions positively, drawing parallels between the current situation and the PPI scandal. He notes similarities in tactics, emphasizing the widespread impact of adding discretionary charges to contracts without consumers’ knowledge in the auto lending industry.
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