- The FCA said lenders must have “adequate financial resources at all times”.
- In January, the FCA launched an investigation into discretionary commission arrangements.
The Financial Conduct Authority has warned car finance providers that they must have enough cash for potential payments as it continues to investigate past failings.
In a letter to car finance companies, published on Friday, the FCA said they need to have ‘Adequate financial resources at all times. in anticipation of covering operating costs and payments related to the historic mis-selling of auto loans.
The British 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 meet future compensation payments.
Warning: The FCA said car finance companies must have “adequate financial resources at all times” before covering costs and payments related to the mis-selling of car loans.
In January, the FCA launched an investigation into ‘discretionary commission arrangements’ (DCA), which were the most common form of car finance lending in the UK until they were banned in 2021.
The DCAs gave vehicle dealers and brokers discretion over the interest rate of a car buyer’s financing agreement.
As a result, brokers were motivated to charge customers higher rates regardless of other factors, such as the value of the loan or the length of the agreement or the customer’s credit score.
Since DCAs were banned three years ago, an increasing number of motorists have made claims alleging they were unfairly denied compensation.
But after the Financial Ombudsman Service and the county courts upheld some complaints, the FCA told lenders to pause responding to complaints received since November 17, when it launched a review of the credit market. car financing.
While this continues, he has asked them to continue examining complaints related to DCAs so that they can “act promptly to resolve them” if the pause is lifted.
The FCA also wants to be informed when car finance companies are involved in DCA-related litigation that is, or may be, subject to appeal.
It said many companies were participating “constructively” in its investigation, but noted that some lenders were “struggling to quickly provide” the necessary data.
This could be because data is stored in multiple systems or distributed among lenders and brokers, or because groups do not maintain all relevant records.
The FCA said: ‘We recognize that this work has created some uncertainty. We want to offer security to consumers and companies as soon as possible.
“However, that depends on quickly receiving complete data from a variety of companies and, potentially, the speed and outcome of any litigation.”
Some analysts believe the DCA controversy could resemble the payment protection insurance scandal, in which lenders pay huge sums of money in compensation to Britons.
Broker Jefferies predicts the car finance industry could be forced to pay out £13bn in relation to the investigation, while RBC Capital Markets believes it will be between £6bn and £16bn.