FCA warns lenders to bolster cash reserves ahead of potential motor finance probe handouts

The Financial Conduct Authority has warned motor finance providers that they must hold enough cash for potential payouts as it continues to investigate past failings.

In a letter to motor finance firms, published on Friday, the FCA said they need to have ‘adequate financial resources at all times’ in anticipation of meeting the operational costs and payouts related to the historical mis-selling of car loans.

Britain’s financial watchdog added that lenders should assess the risks and potential liabilities, including the impact of capital reduction measures, such as dividends, on the ability to fulfil future compensation payments.

Warning: The FCA said motor finance firm need to have ‘adequate financial resources at all times’ in anticipation of meeting the costs and payouts related to the mis-selling of car loans

In January, the FCA began a probe into ‘discretionary commission arrangements’ (DCAs), which were the UK’s most common form of car finance loan until being banned in 2021.

DCAs gave vehicle dealerships and brokers discretion over the interest rate on a car purchaser’s finance agreement.

As a result, brokers were motivated to charge customers higher rates regardless of other factors, such as the loan’s value or agreement length or the customer’s credit score.

Since DCAs were outlawed three years ago, an increasing number of motorists have made claims alleging they were unfairly refused compensation.

But after the Financial Ombudsman Service and county courts upheld some complaints, the FCA told lenders to pause responding to complaints received since 17 November as it launched a review into the motor finance market.

While this is ongoing, it has asked them to carry on scrutinising complaints related to DCAs so they can ‘act promptly to resolve’ them if the pause is lifted.

The FCA also wants to be informed when motor finance companies are involved in litigation concerning DCAs that are, or could be, subject to appeal.

It said many businesses were engaging ‘constructively’ with its inquiry but noted that some lenders were ‘struggling to promptly provide’ the necessary data.

This could be due to data being stored on multiple systems or spread across lenders and brokers, or groups not holding onto all the relevant records.

The FCA said: ‘We recognise this work has generated some uncertainty. We want to provide certainty to consumers and firms as soon as possible.

‘However, that relies on receiving comprehensive data promptly from a range of firms, and potentially, the speed and outcome of any litigation.’

Some analysts believe the controversy over DCAs could resemble the payment protection insurance scandal, with lenders paying out huge sums in compensation to Britons.

Broker Jefferies predicts the motor finance industry could be forced to pay £13billion related to the probe, while RBC Capital Markets believes it will be anywhere from £6billion to £16billion.

This post first appeared on Dailymail.co.uk