What are the key features of the FCA’s final rules for motor finance consumer redress?
What are the key features of the FCA’s final rules for motor finance consumer redress?
NOTE: This page is based on the regulatory position at the time of writing. We will update this page as new information in relation to the proposed FCA redress scheme is available.
The FCA has set out the rules and timetable for redress with a formidable 50-person strong supervisory team to monitor progress. The first deadlines for notifying the FCA of the senior manager responsible, and for the Scheme Implementation Plans, follow on the heels of the publication of final rules. The FCA is working to an assumption that lenders have been gearing up to start redress programmes and that only relatively minor adjustments are required to get plans finalised and operational.
What level of scrutiny is expected from the FCA?
Boards and accountable executives should focus on Chapter 13 of PS26/3; Supervision, reporting and oversight, where the FCA makes its expectations explicit. Firm’s progress will be closely followed and outliers can expect rapid intervention. A supervisory team of 50 is a significant commitment by the FCA and signals the level of scrutiny that is intended.
Scrutiny means the FCA looking at evidence and checking files. It will expect to see evidence of first, second and third line testing to ensure principles and rules are followed. For the accountable senior manager tasked with delivery, the FCA can ask tough questions about how the SMF is satisfied with readiness and progress. For Boards, questions to consider include adequacy of resourcing, reporting, oversight and challenge.
Why has the FCA proposed two separate schemes?
There is the spectre of a legal challenge looming. The FCA has sought to minimise disruption from that with two separate schemes, one post April 2014 and one pre-April 2014 when consumer credit was the responsibility of the OFT. Consumers also still have a choice to use either the free FCA redress scheme or pursue action through the courts. At least one law firm has said it is planning to take an omnibus case with 30,000 consumers through the courts to achieve more redress for its clients. Therefore, the FCA is trying to find the point at which its redress scheme can withstand challenges from stakeholder groups with opposing interests.
How has scheme eligibility changed?
The FCA has narrowed the criteria for eligibility for redress resulting in average payouts rising to £829 per customer from £700. The scheme is aimed at mass market consumers. There is now a de minimis commission level for redress (£120 for pre-April 2014 claims and £150 for post 2014 claims). The definition of ‘high’ commission’ has also narrowed to 39% of the total cost of credit and 10% of the loan amount (from 35%/10%).
Lenders can exercise judgement in a number of areas to either exclude a case from being a ‘relevant arrangement’ or from liability for redress payments:
- High value loans – the scheme is not aimed at high end luxury cars
- Civil limitation - out of scope determination – lenders have the right to exclude on the application of limitation provisions or time barring. Crucially the FCA considers this only applies to high commission claims not DCAs, on the basis DCA’s were generally inadequately disclosed which amounts to a concealment.
- Tied arrangements exception for franchise car dealers/captives
- 0% APRs exception as a better deal was unlikely
- Rebuttals have been extended to apply tied arrangements that were not acted upon, and where no better deal was available.
Exceptions require evidence where excluding cases from the definition of relevant arrangements (CONRED 5.2.19 (6). Therefore, the application of judgements requires robust evidence and rationales that are documented for each case with records maintained and available on request. These are areas likely to be subject to FCA scrutiny.
How is consumer opt in now being handled?
The PS goes some way to simplify the previously convoluted opt in/opt out and consumer contact programme. Now Lenders will be required to only contact those consumers who have not already complained and have been identified as having an agreement that is in scope, with one relevant arrangement (High Commission, DCA or tied arrangement that is not the subject of an evidenced exception). Customers who have already complained are deemed opted in. The exception to this is where consumer claims are time barred. Time barred cases are out of scope, however the judgement to apply a time bar is more complex. Lenders will be required to process time barred cases to a redress determination, and the consumer can challenge the decision, ultimately with a referral to the FOS. The FCA has revised its initial consumer scheme participation assumptions from 85% to 75%. This figure combines take up rates for schemes 1 and 2, with scheme 1 having a slightly lower rate of 72%. This sets a high bar for older cases where records may be poor or non-existent.
Customer communications must avoid confusion and reduce barriers
One of the themes of the PS is the helping consumers keep informed, avoiding consumer confusion and reducing barriers. There are direct references to the application of the Consumer Duty principle and rules. Lenders should now be well versed in processes for helping vulnerable consumers, however, digitally excluded consumers may suffer particular challenges. The scheme sets out detailed communication requirements which must be met.
Firms should maintain records of customer tracing
Customer tracing is likely to be an operational challenge for lenders with older books where records may not exist. The FCA has set out its expectations for finding customers or their personal representatives using commercially available services as well as public records. Technology and AI solutions could be well suited to processing volumes of data to find customer contact details. Again, this is likely to be an area of regulatory scrutiny and therefore maintaining records about tracing steps will be important. The FCA should be able to benchmark Lenders with outliers being more likely to receive targeted interventions.
What can firms expect in relation to consumer complaints?
One area of concern has been the role of the FOS. The FOS will only be able to assess complaints against the redress scheme rules and whether those have been followed. Various operational measures are planned to assist customers with a decision about making a referral to the FOS, the aim being to reduce referrals where possible. However, consumers with time barred claims can challenge the application of the time bar with the FOS. Significant FOS fees could be expensive for Lenders and a decision about FOS case fees is not expected until the autumn, however it seems unlikely these will be heavily reduced for all referrals. Lenders should gear up for complaints from consumers and CMCs when deemed out of scope, excluded or denied redress. Public expectations about redress payouts are high and therefore strong communications and complaints handling processes are likely to be needed.
How BDO can support
Our team has significant experience of regulatory remediation and redress exercises across financial services. We can provide a detailed assessment of your implementation plans against FCA expectations. We can also help you to undertake monitoring as you operate the redress scheme, providing insight where improvements are needed and evidence to the FCA of good customer outcomes. If you would like an expert assessment of your approach, please contact Richard Barnwell.