Mis-Sold Motor Finance: FCA's Initial Findings Due To Be Delayed

Over recent years, the issue of mis-sold motor finance has emerged as a significant concern in the United Kingdom. This involved the practice of discretionary commission arrangements (“DCAs”) which was outlawed in 2021.

The Financial Conduct Authority (FCA) has been actively investigating the practices surrounding car financing, aiming to protect consumers and ensure fair market practices. The initial findings of the FCA’s investigation, which were due to be released in September 2024, have now been delayed to May 2025. When released these finds should shed light on various aspects of this complex issue and provide insights into the actions that may be required to address them. Furthermore, if consumer redress is required guidance may be given as to the FCA/FOS expectations. Whilst these bodies are mutually exclusive they are inextricably linked in regard to the resolution of this issue.

Background on mis-sold motor finance

Motor finance refers to the various financial products available for purchasing a vehicle, such as hire purchase agreements, personal contract purchases (PCP) and Conditional Sale agreements, and certain lease purchase options. These products have become increasingly popular, enabling consumers to spread the cost of a car over a period of time. However, with this rise in popularity, issues have surfaced concerning how these financial products are sold to consumers.

Mis-selling occurs when consumers are provided with inadequate information, misleading advice, or are pressured into financial agreements that do not suit their needs or financial requirements. Common problems include:

• Lack of transparency: Consumers often find themselves in agreements with hidden fees or unclear terms;
• Inappropriate agreements: Some consumers are sold finance products that are unsuitable for their circumstances, leading to financial strain;
• Inadequate risk disclosure: Buyers may not fully understand the risks associated with certain types of finance agreements, especially those involving residual value at the end of the term.
• Secret commissions and hidden profits;
• Disadvantageous commission rates.

Potential implications and next steps

It’s clear the FCA’s initial findings, even if they do not lead to significant redress, are bringing about pivotal changes for the motor finance industry. The alteration in terms of behaviours is impacting car dealership groups, brokers and funders. The interesting dynamic will be that if there is the need for either remediation and/or compensation, who will pick up the bill for that? And how will the parties address that amongst themselves?

In terms of the Consumer Duty, this is a stark indication to all those operating in this sector that engagement with consumers should be collaborative in order to deliver the best outcomes for consumers and to protect the funder and their connected parties from future liability.

However, the consumer duty is not prescriptive and is outcome-based. Therefore, given the different commercial approaches, it is hard for funders and their partners to ensure that they are comprehensively aligned with their regulator.

To address these issues, the FCA is expected to implement several measures:

• Stricter regulations: The FCA may introduce tighter regulations to ensure greater transparency and fairness in the sale of motor finance products. This could include mandatory disclosure of all costs and clearer guidelines on presenting risks to consumers;
• Improved oversight: Increased oversight of dealerships and lenders could help ensure compliance with best practices and ethical standards;
• Consumer education: Initiatives to educate consumers about their rights and the details of finance products could empower them to make more informed decisions;
• Penalties for non-compliance: The FCA might consider imposing penalties on companies found to be consistently violating regulations, thereby incentivising adherence to proper sales practices.

Conclusion

As the FCA continues its investigation and implements corrective measures, it is hoped that these efforts will lead to a more transparent motor finance market in the UK. This will not only protect consumers but also enhance trust in the industry as a whole.

That said, this new government now has an opportunity to simplify the regulatory landscape. The Consumer Credit Act 1974 was the cornerstone of the credit landscape since 2014, and those dealing with consumers now must take a meticulous approach to the rules that regulate them. Anyone who has ever tried to navigate through the thickets of this regulatory landscape will often be baffled by the complexity of the legislation, handbook, PERG and ancillary regulations and how these requirements interact in outcome based scenarios.

Surely now is the time to make this regulatory landscape more linguistically comprehensible and easier for all stakeholders to understand?