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Britain’s top financial regulator has launched an investigation into past fee arrangements offered by car finance companies following a spike in customer compensation claims.
In 2021, the Financial Conduct Authority banned discretionary fee arrangements, saying they give car finance brokers and dealers an incentive to increase interest rates on customer loans.
The regulator said in a statement on Thursday that it would review how “several companies” applied fees before the ban, following a number of customer compensation claims for contracts that predated the ban.
The FCA said it would “identify the best way to ensure that those liable for compensation receive appropriate settlements where we find that misconduct is widespread and consumers are suffering losses.” .
“Where necessary, we will resolve generally significant legal issues,” it added.
The regulator noted that a “large number” of complaints had been dismissed by the auto finance group, which “based on applicable legal and regulatory requirements, does not believe that it has caused unfair conduct or customer loss.”
The investigation follows two judgments in favor of consumers by the Financial Ombudsman Service, the public body that resolves disputes between businesses and customers. The FCA said the incident was likely to result in a “significant increase” in claims.
Some lenders allowed brokers and car dealers to increase their fees through voluntary fee arrangements that tied the fees brokers received to interest rates.
Kate Robinson, principal at regulatory consultancy Avis Partners, said she expected complaint management firms to be “absolutely out of control”. “It looks like this [payment protection insurance (PPI) scandal],” she added.
The PPI scandal dates back to the 1990s, when banks mistakenly sold certain types of insurance products to millions of customers, including those who were not eligible for payments or who did not know they were purchasing them. Banks have since been hit with billions of pounds worth of fines and compensation claims.
The FCA on Thursday asked car lenders to suspend responding to complaints for around nine months while it investigated the matter.
Simon Evans, chairman of the Consumer Relief Association, a trade group for insurance claims managers, said: “We are very pleased that the FCA has finally put a stop to regulatory change.” “This is not a system that is working the way it should.”
The FCA said customers who took out car loans, including private contract purchases, before 28 January 2021 may be affected and have reason to lodge a complaint.
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