To allow it to undertake urgent discovery activity on the issue, the FCA has made immediate (but temporary) changes to its complaint handling rules for DCA. However, despite this temporary `relief', with complaint volumes significantly rising due to subsequent media coverage, there are a number of urgent actions firms should take now to respond to immediate challenges and plan for longer term scenarios.
What has happened?
Both the FOS and FCA have published separate, but choreographed and coordinated, communications on the long-running regulatory issue of DCA.
(i) FOS test cases outcome
The FOS has published its long awaited decisions (here and here) on DCA complaints. The decisions are long and complex, but it has upheld both of them in favour of the customer — determining that the way commission arrangements worked between the lender and the broker were inappropriate. The common themes were:
- Inherent conflict of interest — The DCA gave the broker an incentive to set a higher interest rate than the lender would have ordinarily accepted for the risk.
- Failure to treat customers fairly — The DCA terms were contrary to the FCA guidance that differential commission rates should only be offered where the rates were justifiable based on the extra work involved. As such, they were contrary to both FCA Principle 6 as well as specific provisions within the Consumer Credit Act.
- Inadequate disclosure — There was a failure to disclose the DCA structure to the consumer by both the lender and broker which created an asymmetry of information thereby impairing the customer's ability to make an informed decision.
(ii) FCA's subsequent announcement
In response to the decisions, the FCA has taken action — introducing temporary complaints handling rules and confirming it has commissioned a number of s166s on affected firms to reach a more definitive understanding on the size and materiality of the DCA issues.
The temporary changes to the complaints handling rules mitigate the risks of increased DCA complaints leading to inconsistent outcomes for customers whilst the FCA determines whether a more significant intervention is required.
In short, to allow the FCA time to conduct their review activity (including the s166s) the complaints handling rules for DCA complaints are amended to (i) suspend the eight-week time limit (for a period of nine months) and (ii) extend time limits for customer referral to FOS from six to fifteen months where a final response is issued outside the normal eight-week time limit. This is effective immediately and will run until September 2024 (by which time the FCA expect to have determined their next course of action).
Whilst the FCA’s s166 investigations are focused on a small number of firms, the Policy Statement signals that the FCA’s concern is more widespread.
The temporary changes to the complaint handling rules negate the need for firms to issue final decisions on DCA complaints during the ‘pause’. However, in the FCA’s recent webinar on the topic, it was clear that operational processing of these cases — including keeping the customer reasonably informed, separating out unrelated complaint points and completing the case investigation as far as possible — is expected. This, coupled with the media coverage including by Martin Lewis and the release of his complaint tool, mean firms face immediate complaint handling and DSARs challenges, both through volume and complexity. Additionally, they need to plan for potential outcomes of the FCA discovery activity and respond to Skilled Person requests if they are included in the s166 investigation.
In this article, KPMG in the UK explores the ‘no regrets’ actions firms should take to put themselves in the best position to respond to increased complaint and DSAR volumes, any further regulatory intervention or inform their own potential redress activity.
What action should firms take?
We know that the FCA has announced that it will undertake s166 activity with several firms. Firms generally dispute that they have acted in an unfair or non-compliant way and that their actions have caused consumers loss. However, whilst the discovery activity is underway and pending the outcome and any response from firms, there are several ‘no regrets’ activities that firms should undertake, in parallel, including to (i) adapt their complaint handling process and consider surge capacity requirements, (ii) prepare for the eventual outcome and response and (iii) deep dive into their own specific policies, governance and oversight arrangements and individual cases.
KPMG in the UK has summarised these considerations below.
'No regrets' actions
1. Develop interim complaint handling strategy
- The FCA have advised that firms should continue to progress DCA complaints where possible during this period by continuing to investigate and collect evidence to help with their resolution.
- Firms should therefore develop their strategy for complaint handling and amend policies, procedures and guidance accordingly. This should include consideration of (i) an initial triage to identify DCA complaints and identify whether the complainant was subject to a DCA arrangement or not, (ii) a strategy of how to progress with complaints in line with the FCA guidance, including keeping the customer informed whilst progressing complaint points that can reasonably be separated from the DCA complaint and (iii) preparing for the delivery of final decisions, at pace, once the FCA diagnostic activity is concluded and the complaint handling deadline starts ticking again.
- As part of the above activity (and throughout more generally) firms will have to consider variations to that policy in respect of vulnerable customers.
- Critical to managing the volume of complaints which will require a response when the pause is ended, will be accurately capturing the key complaint data points into a standardised and usable format to ensure consistency in response and enable automation opportunities.
2. Prepare for a surge in complaint volumes
- Given the announcement, the media coverage and the extension of the timeline for a customer to take their complaint to the FOS, firms should expect a surge in complaint volumes and FOS referrals, including from Final Decisions Letters issued in the last six months.
- Firms should act to respond to this increase in volume, increasing surge capacity in BAU complaints and FOS referral teams with clear training and guidance delivered for the agreed strategy, as per above.
- In addition, firms are also experiencing an increase in Data Subject Access Requests (DSARs) and therefore consideration should be given to enable focused DSAR processes, negating the need to operate full DSAR journeys, and associated automation opportunities.
3. Identify and prepare the customer data
- Detailed mapping of your commission models and dealership arrangements that existed over time will be required — including when, how and why they were changed and corresponding segmentation of the loan book.
- Ringfence a data analytics space for arrangement-level data including commission model type, APR, interest rates, loan start and end dates and monthly transactions to determine the in-scope population. This should include appropriate validation testing, governance and documentation to provide confidence in the data as a single source of truth for responding to regulatory requests and customer DSARs and complaints.
- Arrange necessary internal data dispensation to hold certain customer agreement and transaction data going as far back as possible as this will be required to award affected customers with a fair but precise redress.
4. Determine policy and risk appetite
- To accurately forecast the potential scale and scope of complaint and redress activity, proactive consideration should be given to the development of your key policy and risk appetite decisions, including policies for redress, consequential loss and tolerance thresholds.
5. Define redress methodology & calculations
- Create a robust and comprehensive redress methodology that is designed to enable accurate calculation of redress, including its various components, such as interest refund, fee refund, and compensatory interest.
- The methodology should pay special attention to non-standard customer journeys, such as those involving arrears, early settlement, and contra agreements. This will help to ensure that all customers are treated fairly and equitably, considering their individual circumstances.
- To facilitate the implementation of this methodology, a redress calculator should be developed. This calculator will need to be able to accurately determine case-level redress and flag high-risk cases where the customer has been under vulnerable circumstances or where data quality limitations require manual judgement.
6. Develop remediation strategy
- This should include key factors that may impact the scale, duration and cost of any remediation — such as proactive vs reactive remediation, customer contact strategy, evidential standards, operational capacity and location considerations.
- Proactive consideration should also be given to automation opportunities, including the use of AI for effective case triage, end to end case workflow, automated letter generators and digital channels connected to the database outlined above.
7. Determine communications and PR approach
- Given the likely media attention on the issue and the announcement made by the FCA, firms should develop a communications strategy, considering engagement with all stakeholders: customers, relevant third parties, the press, FCA/FOS and CMCs.
8. Consider Legal support
- Firms are likely to need legal support in relation to a number of the actions set out above, and in particular in relation to the complaints handling, remediation strategy and the communications and remediation playbooks.
- Consider whether external advice is required as part of some of the steps above, particularly how the firm can protect legal advice privilege in respect of working with multi-disciplinary advisers.
- Develop/update the legal strategy around connected litigation and the potential challenge or appeal of the FCA and the FOS decisions. This could include assisting in providing wholesale or bespoke responses to complaints or requests for information received (in particularly from CMCs whereby bulk complaints are likely to be received).
- Undertake a detailed analysis of historic DCA agreements entered into with a firm's broker network along with any guidance/information shared within the network to assess potential risks or weaknesses and providing recommendations as to the most pragmatic go-forward approach.
- Provide support in the preparation and review of responses regarding any legal implications to the regulator.
- Prepare guidance and information to share with a firm's broker network to help ensure that clear lines of communication and structure are in place to best assist the regulator and prevent potential gaps arising which could lead to potential risks or further liability arising.
How can KPMG in the UK help
We offer multi-disciplinary professional services that enables us to support clients across a wide range of activities required through Consulting, Legal and Managed Service businesses.
- Regulatory and Remediation experienced consultants — At KPMG, we have a highly experienced team of regulatory and remediation specialists. Our consultants can support you on any or all of the above `no regrets' actions, including the design and development of your complaint handling strategy and preparation for potential remediation including policies and treatment strategy, operating model and customer engagement approach.
- Technology and Data Analytics specialism — Our technology consulting team can support you with identification and validation of the customer populations that come under the scope of any remediation. This involves extracting information from old contract documents and annual statements and the building of automated case files. We can additionally support you with outcome testing technologies, enabled by AI-based call listening and insights.
- Redress Methodology & Calculation — We have substantial experience of redress calculator design and validation and have helped several banks and lenders with redress calculators on industry-wide issues such as PPI, Backage Banking Accounts (PBA) and other Motor Finance initiatives. Our consultants can support with defining a detailed redress methodology, and the build, validation or automation of redress calculators.
- KPMG Legal support — Our KPMG Law team has significant regulatory and disputes readiness experience. Working hand in hand with consulting and regulatory advisory teams to help protect our client's position and provide legal support through the strategy and remediation process. This includes legal advice on specific elements of the programme, contractual and file reviews as well as disputes and public law support alongside leading Counsel.
- Managed Service solutions — KPMG's managed service can help provide a range of operational solutions, including capacity management through resource augmentation through to operational execution and delivery. We have an onshore, specialist Remediation Academy who are specifically trained and experienced in operational remediation delivery.
