Labelled as the ‘new PPI’, motor finance discretionary commission agreements (DCAs) are the Financial sector’s latest scandal, creating fear of fines, reputational damage, increased service demand – all on top of monetary redress values.
Businesses will be keen to avoid the monumental costs associated with PPI over the past 15 years, during which over £50bn has been paid to UK consumers. Early estimates associated with the DCA space have the cost to industry between £6b-16b. So how should these next few months be navigated now the dust has settled on the FCA’s motor finance announcement?
Proactivity, in the right focus areas, is essential. But the practical actions that support this, like due diligence, proactive reimbursement, and complaints upskilling, will be most impactful between now and September.
We show why this is the case below, applying our knowledge of PPI and Unaffordable Lending, to help FS firms with handling the latest scandal.
Another financial scandal, but how?
Trust in UK banks, and other financial services, took a major hit in the early 2000s – it's struggled to recover ever since. With the PPI scandal dominating the noughties, compounded by the financial crisis of 2008, the FSA was dissolved - paving the way for the FCA in 2013 to focus more heavily on consumer protection … So how are we here again?
In a nutshell, lenders allowed brokers (in the form of car dealers and other firms) to adjust the interest rates on car finance agreements. We saw this result in inflated agreements, and generate more commission for the brokers, which was all perfectly legal.
However, it was highlighted that some of this commission was obtained from hidden fees, or hidden increases in interest rates. This is where the FCA and FOS come into the picture, as the hidden fees represent a breach of consumer protection.
The FCA banned this practice in 2021, but the FOS recently upheld two complaints regarding DCAs in the motor finance sector. This caused the FCA to invoke a review of DCAs, and effectively pause the response to complaints received until late September.
Consumers are still eligible to submit complaints but will not receive a response until the FCA has provided a steer for the financial companies. The FOS believes a further 10,000 may have been charged too much for their motor finance, with “many more waiting in the wings”.
Following the FCA’s announcement, Martin Lewis used his platform to highlight this breakdown of trust, providing an online form for consumers which is easy to complete and recognised as a formal complaint. One million people have now completed this form.
What does this mean for financial institutions?
Whilst the media may be reporting that financial institutions are setting aside millions of pounds for the redress of these complaints, the businesses themselves will be extremely nervous about maintaining service levels during this influx.
Businesses may face challenges with:
1) Operating cost
Investigating complaints naturally incurs a cost. This is often exacerbated by inefficient processes, poor data quality, and resource constraints. The potential for future claims, akin to the PPI scandal, adds a layer of complexity and cost, due to the requirement to maintain legacy processes.
2) Reputational damage
Financial institutions face reputational challenges, with various firms still feeling the effects of the negative attention surrounding PPI. Some are already announcing large redress figures earmarked for this latest debacle, in an attempt to appease consumers, and maintain the little trust they have with their customer base.
Less than half of UK adults, or 21.9 million people, had confidence in the UK financial services industry and just 36% agreed that most financial firms are honest and transparent in the way they treat them.
FCA, 2022
3) Risk of fines and FOS fees
A sudden influx of complaints will place a strain on any service department. If this strain isn’t managed effectively, and the backlog of complaints grows exponentially, then there’s a material risk of complaints not being resolved in a timely manner.
Failure to adequately service customers could result in extra scrutiny from the FCA, with potential fines being imposed. Also, a rushed turnaround of complaints with little investigation generates an additional risk of customers escalating complaints to the FOS, costing £750 per occasion.
4) Lingering share price damage
Following the news of the FCA’s investigation, various companies took an initial hit on their share price value. We’ve seen large companies lose as much as 10% of their share price, and another lose over 60% of their share price value, since the FCA’s announcement. These effects will linger much longer than the impact of potential initial redress.
Risk of complaints – How to mitigate the operating model impact
As is usually the way, preparation is key. Companies have until September to build an effective complaints team, specifically designed to handle these complaints.
Based on our experience with complaints surrounding PPI and Unaffordable Lending, firms should focus on:
1) Setting an example
We’re anticipating the FCA will make an example of financial institutions with this latest scandal. Given maintaining legacy processes can cost up to £200k a year for large firms, combined with reputational damage and share price impacts, it could be advantageous to set an example by proactively identifying and reimbursing consumers, before the FCA makes a decision.
To put it in perspective, the FOS are still receiving complaints regarding PPI, some four years post the deadline. Mobilising a taskforce to identify every account impacted, and proactively remediating them, could save you millions in the long run, as well as boosting your reputation as market-leaders.
2) Performing initial due diligence
Proactively determine who in your account database will be affected by these complaints, and ensure the data is readily available if required.
3) Setting your business up for success
Treat DCA complaints as a standalone process with streamlined inputs, minimal waste, individual risks and controls, bespoke automation tools, and a clear intent and strategy.
4) Building your DCA complaints taskforce
Do you have capacity in the wider business to upskill employees, creating a short-term taskforce? Locating under-utilised resource, and empowering them to investigate and remediate these extremely specific complaints, is the most cost-effective model.
Otherwise, financial institutions should look at offshoring this process, if they have the capability or look towards contractors, rather than hiring full-time employees.
5) Training and upskilling staff
Whilst we recommend the upskilling of specific agents to generate a new taskforce, it’s also advisable to upskill wider teams, should the escalation route receive more strain than anticipated, and short-term levers are required to maintain service levels.
How we can help
At BFY, we have an extensive knowledge of PPI and Unaffordable Lending, and can support your business in creating bespoke processes, training, and risk reviews to ensure you’re set up for success ahead of the September deadline.
Read more about our previous experiences here, where we transformed the operating model of a large energy supplier to save ~£7.5m in cost avoidance and reduction in Ombudsman fees, or here where we discuss FS complaints in more detail.
Tom Deen
Tom works with clients to maximise efficiencies, improve processes, and ensure strong relationships are maintained.
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