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Motor finance discretionary commission arrangements: How can organisations prepare?

The FCA’s review of discretionary commission arrangements in motor finance is now expected in May 2025. Learn how your organisation can prepare.
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By Zoe Rawson , 

Vice President, Financial Institutions

23/12/2024 · 5 minute read

The UK Financial Conduct Authority’s (FCA) announcement of a further delay in its review of discretionary commission arrangements (DCAs) in the motor finance industry provides organisations with an opportunity to prepare for upcoming action. The FCA’s review, now expected in May 2025, will apply to financial institutions, banks, and non-bank lenders that have financed motor purchases using DCAs.

Why is the FCA reviewing the use of DCAs?

Historically, DCAs have been a significant feature of motor financing. Between 2007 and 2020, approximately three-quarters of all motor finance agreements included elements of DCAs.

In 2021, the FCA banned DCAs to reduce the risks associated with the commission model that allowed motor finance brokers and dealers to manipulate interest rates, leading to higher costs for customers. On January 11, 2024, the FCA announced a review into the past use of DCAs. All agreements made between April 6, 2007 and January 28, 2021, are included in the review. The FCA’s Chief Executive, Nikhil Rathi, said it is “improbable” that the regulator will find nothing to report from its investigation.

The FCA also extended the deadline for consumers to complain to July 29, 2026. The Financial Ombudsman Service (FOS) has paused complaints handling related to DCAs until December 2025, pending the potential implementation of a redress scheme or another directive from the FCA.

Recent legal developments regarding DCAs

On October 25, 2024, the Court of Appeal ruled that it was “unlawful” for car dealers to receive commissions from lenders issuing motor finance. The Court determined that commissions were not adequately disclosed to customers, resulting in a lack of informed consent. A key argument was that these arrangements created an unfair relationship under the Consumer Credit Act 1974.

This legal ruling is likely to influence the FCA’s approach to its review of DCAs. In particular, lenders should consider the potential enforcement of a consumer redress scheme across the motor finance industry, as the likelihood of such an intervention “has increased,” according to the FCA.  

What risks does this pose to motor finance lenders?

A redress payment scheme could impose significant financial obligations on lenders toward their customers. For example, the FCA could demand that lenders repay the difference between the offered and withheld interest rates, along with interest and additional compensation to affected consumers. However, it remains unclear what level of compensation the FCA may enforce through redress payments.

The use of DCAs may be deemed as mis-selling of financial products, falling under the remit of Section 166 of the Financial Services and Markets Act 2000. From an insurance perspective, claims will primarily target professional indemnity (PI) policies. However, there is also potential for claims against directors and officers (D&O) insurance if it is alleged that the board of an organisation was aware of specific wrongdoing.

In addition to redress costs, lenders may incur costs related to internal investigations of financing involving DCAs. Organisations should account for staffing costs to sort data, legal fees, and possible external support. Companies found repeatedly responsible for offences related to DCA loans may also face reputational damage, which could deter future customers and impact share prices.

Furthermore, organisations should consider the potential, broader ramifications of the FCA’s decision. For example, the possibility that future rulings may expand to include commercial vehicles or extend to other lender-broker-consumer relationships in different financing sectors.

What mitigation options are available to motor finance lenders?

The FCA’s deadline extension gives lenders additional time to address DCA motor finance complaints and develop effective mitigation strategies.

Lenders should establish a framework to manage future redress claims. While this will likely be guided by what the FCA mandates, topics for lenders to consider include: 

  • Gathering relevant data
    Lenders must identify and access all data relevant to the FCA judgement, ensuring that it is accurate, accountable, and high quality. This process will involve reviewing legacy systems for all motor finance loans, including those that may have been paid off in previous years.
  • Handling customer complaints
    The FCA’s ruling is expected to trigger a surge in consumer complaints regarding the use of DCAs. To effectively manage complaints, lenders should implement a robust customer complaint policy and ensure customer service teams are adequately staffed to handle increased volumes.
  • Communicating with brokers and insurers
    Lenders should engage with their brokers to understand their insurance policies. Efforts should be made to ensure coverage is sufficient to address potential claims arising from the FCA’s decision. Additionally, lenders should notify their broker of any circumstances that could lead to claims.
  • Financing potential redress claims
    Lenders should devise plans for financing customers’ complaints regarding DCAs. It is important to assess potential risks thoroughly and create models to estimate potential financial liability.

Taking action now

Organisations in the motor finance sector must assess how the FCA’s decision may impact their portfolios. Leaders should ensure that their organisations are prepared for any enforcement actions by the FCA. 

For further discussion on how to prepare your organisation ahead of the FCA’s decision, reach out to your Marsh contact.

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