The FCA has commented on the legal challenge currently going through the Tribunal:
"It is prudent for us to supervise lenders against a central planning assumption that in the event the scheme, or parts of it, are quashed, there would be no complaints pause and no motor finance compensation scheme."
I think that this is significant.
The old phrase ‘hope for the best, plan for the worst’ is definitely relevant here. The FCA are saying that it sensible to plan for a scenario where complaints have to be handled individually, even though they believe that an industry-wide redress scheme is the quickest, fairest and most efficient way to compensate consumers.
The FCA are obviously going to defend the scheme before the tribunal and their requirement that firms continue to prepare suggests that they either expect the scheme to go ahead as planned, or that it will go ahead with only certain aspects of it changing.
If the scheme doesn’t go ahead, the industry will have to deal with complaints on an individual basis under the existing DISP complaints process.
With so much publicity around the scheme, we can be sure that whatever the legal outcome, there will be a large volume of enquiries and complaints that will need to be handled, so preparing now is invaluable. The FCA has therefore suggested that firms should continue gathering information and preparing. Whatever the final outcome in the courts, dealers should be:
Organising their records
Reviewing their contractual exposure
Clarifying what they do (and do not) have to provide to lenders
Establish robust complaint-handling processes
Plan for the operational resources needed for low volume of complaints, and high volume of complaints
Doing this will ensure that, dealerships will be operationally resilient and in a strong position to manage complaints without the workload impacting on the day-to-day business of selling cars.
Here are our suggestions as to what dealerships should be doing as the legal challenges make their way through the tribunal process.
Prepare for Managing Claims
The greatest issue for motor dealers will not be around any financial liabilities. Being unprepared for a high volume of customer complaints, information requests and legal enquiries is a much bigger issue.
There are several practical things which motor dealers can focus on now. Here’s what we suggest:
First, Understand Your Position
Firms need to understand their specific position, so they need to:
Identify agreements where there may be a complaint
Gather their historical disclosure and commission data
Preserve records
Review current complaint and redress procedures
Are they robust enough to cope?
Handing Complaints Now
The FCA expects firms (including dealerships) to continue progressing complaints, where possible. However, where a complaint may ultimately result in compensation, that firm should explain that:
The redress scheme is currently subject to a legal challenge
That the implementation has therefore been partially suspended by the Upper Tribunal
This means that delays are likely
Firms should not be trying to calculate compensation, notifying customers that compensation may be due, or trying to pay compensation.
Create a Claims Response Strategy and Process
Many dealers have never had to deal with complaints on such a large scale.
Even if the lenders are responsible for compensation, dealers may receive a large number of enquiries from former customers who are looking for information about their finance arrangements or want copies of their documents.
It would be sensible for motor dealers to establish:
A central contact point for complaints / enquires
Complaint-handling procedures
Escalation routes
A suite of standard customer communications
Record-keeping procedures
If we do end up with consumers making individual complaints, consistency in managing them is crucial.
Build a Historical Evidence File
The biggest challenge in many cases will be proving what happened years ago. Dealers should be identifying and preserving the following documentation:
Finance introducer agreements
Commission schedules
Sales scripts
Customer documentation
Compliance manuals
Training records
FCA permissions and regulatory records
An absence of this information would reflect poorly on a motor dealership.
Review Relationships with Finance Providers
An important question is whether lenders will seek contributions from dealers where consumer complaints are upheld. A dealership should review their contracts with finance providers. In particular, motor dealers should review:
Indemnity clauses
Liability provisions
Compliance warranties
Information-sharing obligations
The responsibility has been put onto lenders to fund the scheme, but once billions of pounds of compensation are involved, it would not be surprising if lenders looked to offset some of the cost by looking at their contracts with their motor dealer brokers.
Stress-Test your Operational Capacity
If the FCA redress scheme doesn’t go ahead, consumer complaints could arrive every day over many years rather than going through a structured industry process. Dealers should have a plan and ask themselves how they would cope:
How would they handle 100 complaints?
How would they handle 1,000 complaints?
Who is responsible for finding historic files?
Who manages legal correspondence?
Who liaises with the lenders?
Thinking through these questions help focus on the resource implications for handling individual complaints.
Assess Financial Exposure
Even where dealers are not liable to pay compensation, there may be additional costs incurred:
Complaint handling
Staff resources
Record retrieval
Managing regulatory enquiries
Legal advice
Litigation support
Management teams should consider this when budgeting for handling complaints, rather than assuming the issue will only affect lenders.
Possible Outcomes Dealers Should Plan For
Scenario 1
The FCA scheme proceeds largely as proposed, with lenders funding compensation and dealers primarily provide information and support.
Scenario 2
The scheme is modified following these current legal challenges, with dealers facing increased requests from lenders, consumers and the Ombudsman. The main concern here would be the disruption to normal operation (with possible staff resource issues).
Scenario 3
The redress scheme is abandoned, and claims revert to being individually handled with the industry facing years of managing complaints, Ombudsman involvement and court activity. Dealers would become directly involved in responding to evidence requests, witness statements and historic complaint investigations. The costs may be less about the compensation for consumers, and more about administration, legal support and business disruption involved.
Share this post: