The motor finance mis-selling scandal has erupted into a major financial and reputational crisis for the industry. The improper selling of Personal Contract Purchases (PCPs) and other motor finance products has drawn intense scrutiny from regulators and consumers alike, with potential costs exceeding £17 billion – making it the second largest mis-selling scandal in UK history.
Here, Andrew McIntee explains that affected finance companies must prepare carefully for an extensive remediation phase, which will require the scaling up of resources and, in many cases, specialist external support.
The roots of the scandal
Motor finance mis-selling first came to light when the Financial Conduct Authority (FCA) began investigating the widespread use of discretionary commission arrangements (DCAs) in the sector, where car dealers and finance brokers could inflate interest rates on loans to increase their commissions.
The FCA published a damning report in 2020 revealing extensive issues within the sector. Key findings included inadequate disclosure of essential information, unfair commission structures, and significant financial harm to consumers. The FCA subsequently banned the use of DCAs and mandated that all motor finance providers offer greater transparency and fairer terms.
Staggering costs of the fallout
The FCA’s efforts aimed to ensure a fairer market, but the financial implications for the industry are likely to be severe and unprecedented.
The FCA believes that as many as four in ten finance packages sold before January 2021 may have involved some form of interest rate inflation. With average compensation per affected consumer estimated at £1,100, analysts have suggested that the total compensation for the scandal could reach £17 billion.
Provides are already making substantial contingencies for big payouts. Lloyds Banking Group (one of the largest motor finance providers in the UK through its Black Horse brand), for example, has set aside £450 million to cover potential compensation claims and regulatory penalties.
Large-scale remediation
The question now is, with a significant remediation period looming, what steps should impacted finance companies be taking?
In the immediate term, providers have already begun working on adapting to comply with new regulations. Companies are overhauling their sales processes, updating IT systems, and retraining staff; the new rules have also led to increased requirements around compliance monitoring and regular reporting.
Even more critically, however, companies are also beginning to gear up for the mammoth process of remediating past cases of mis-selling.
As the PPI scandal has taught us, dealing effectively with hundreds of thousands of claims can create a significant strain on a business and necessitate a substantial resource allocation. For many companies in the sector, it will involve assembling large dedicated teams of remediation experts.
For most, achieving this at scale and at pace will require external support and expertise. NSCG’s Consulting on Demand service, for example, is designed to provide rapid mobilisation of expert consulting teams for large-scale, fast-moving critical projects. In terms of the motor finance mis-selling crisis, Consulting on Demand can ensure that specialised consultants are quickly assigned and deployed to effectively manage complex remediation projects.
The service uses proprietary methodologies to benchmark and streamline the assessment of consultants, ensuring that only the most suitable experts are selected for the specific requirements of the remediation programmes. It also includes accelerated onboarding processes, enabling organisations to start addressing the mis-selling issues without delay.
What the future looks like
While the immediate focus is firmly on the impending period of remediation, the entire motor finance sector will also need to do some soul searching to reflect on how the scandal arose and to ensure it never happens again.
There will certainly need to be a dedicated effort to reverse reputational damage within the sector. This rebuilding of consumer trust will require extensive and honest consumer engagement efforts, as companies strive to assure customers of their commitment to transparency and fairness.
Certain cultural aspects within the motor finance industry, where aggressive sales targets often overshadowed compliance, will also need addressing longer-term. Indeed, the scandal is likely to drive significant changes in how sales teams are trained and incentivised.
A watershed moment
The motor finance mis-selling scandal is a watershed moment for the industry. While the financial and operational costs are likely to be substantial, the long-term benefits of a fairer and more ethical market could ultimately lead to a healthier industry.
In the immediate term, impacted organisations will need to ensure they have the expertise and capacity in place to deal with handling thousands of claims effectively and efficiently.
Fortunately, services such as Consulting on Demand can bring expert consulting teams online quickly and effectively.