The Financial Conduct Authority (FCA) has warned motor finance providers to hold back adequate financial resources for potential payouts as the regulator continues to investigate the sector.

Since January, the FCA has been investigating whether consumers have historically been charged inflated prices for car loans through discretionary commission arrangements (DCA).

In 2021, the regulator banned discretionary commission arrangements in the motor finance market, which removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance. According to the FCA, there have since been a high number of complaints from customers claiming compensation for commission arrangements prior to the ban.

The FCA revealed today it has observed firms taking different approaches to account for the potential impact of previous use of DCA on their financial resources and is writing to firms to remind them they “must maintain adequate financial resources at all times”.

Since the investigation was launched, Lloyds Bank announced in February it was putting aside £450m to cover any potential fines and compensation for borrowers, as it acknowledged it was facing “significant uncertainty” over the potential investigation.

On 3 April, Barclays commenced judicial review proceedings of the Financial Ombudsman Service’s decision to uphold a complaint relating to DCAs.

The FCA has stated that while each firm will need to examine its own specific circumstances, it is expecting this to include planning for any additional operational costs from increased complaints, and to also meet the costs of resolving these complaints.

“Firms involved in our review have engaged with us constructively,” an FCA statement said. “However, many firms are struggling to promptly provide the data we need. Reasons for this include data being stored on multiple systems or being spread between lenders and brokers. In some older cases, firms have not retained all relevant records.”

The regulator also stated that it recognises this work has “generated some uncertainty”.

“We want to provide certainty to consumers and firms as soon as possible,” it added. “However, that relies on receiving comprehensive data promptly from a range of firms, and potentially, the speed and outcome of any litigation.”

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