On 12 April 2024, the FCA issued a statement on its website reminding motor finance firms that they must maintain adequate financial resources at all times.

Earlier this year the FCA announced that it was using its powers under the Financial Services and Markets Act 2000 to review sales of historical motor finance discretionary commission arrangements (DCAs) and as part of this review it has observed firms taking different approaches to account for the potential impact on their financial resources. As a result, the FCA is reminding firms that they must maintain adequate financial resources at all times. In particular, the regulator expects firms to be planning for any additional operational costs from increased complaints regarding DCAs and, where applicable, to be able to meet the costs of resolving those complaints.

The FCA also sets out in its statement an update on the progress of its review and what firms should be thinking about including that they should continue investigating the complaints they receive involving a DCA and that they should consider the Information Commissioner’s Office guidance on responding appropriately to data subject access requests. The FCA adds that it will set out its next steps by 24 September 2024 at the latest, and, if necessary, it will extend the review.

Matthew Gregory commented:

“All firms, including consumer credit firms who are not subject to the same prudential requirements as banks, are required to maintain appropriate financial and non-financial resources as part of the Threshold Conditions for authorisation. This letter to motor finance firms from the FCA highlights the significant potential prudential impact of the FCA’s review of DCA arrangements amongst motor finance firms, arising from remediation and customer redress liabilities. 

“The letter highlights the impact which potential remediation and redress may have on firms’ solvency. There have been various estimates of potential liabilities and this will raise concerns amongst many firms as to the financial impact of the findings which are due later this year and approaches to present contingent liabilities.

“The FCA’s letter is likely to be interpreted by some as a signal as to the FCA’s direction of travel on the DCA review and the potential for customer redress. It also clearly raises the prospect of potential firm failures arising from redress liabilities, and this seems to be an early warning from the regulator to some firms to ensure they have shored up their balance sheet to withstand this impact.”