Consultant Zone

Complaints – root cause analysis

You cannot open a consumer supplement of any newspaper today without seeing predictions of the next ‘mis-selling scandal.’ Since the PPI tsunami receded, commentators have suggested numerous products that the Claims Management Company [CMC] industry may target next. The current focus is on the car finance industry and particularly, the financing of car loans.

It’s not just periodicals either; radio and TV adverts and most social media accounts are bombarding us with adverts suggesting millions of consumers are “owed thousands” in compensation. These adverts focus on both traditional loans and contract purchase arrangements. The recent perfect storm of low interest rates coupled with a glut of motor vehicles drove consumers to trade up and change cars with little thought – it was simply too easy. The Finance and Leasing Association website shows that car finance borrowing in 2021 was £45 billion and that there were 6.2 million outstanding loans. Whilst its commentary shows the latest volumes have now reduced, the potential opportunity for CMCs is massive.

At the same time complaints to the Financial Ombudsman Service [FOS] in respect of car finance are up 87%. These complaints now rank third in the FOS complaints table, behind bank accounts and credit cards. A sub-category of complaints (about commissions, fees and charges) is also growing quickly.

Commonly the lender receives the complaint, but the loan was sold by a third party, in this example, car dealers. When offering finance options, those dealers need FCA approval, whether that be ‘limited’ or ‘full’ permission status. As a result, the regulator oversees the activities of around 60,000 businesses.

When reviewing historic complaints where third parties are involved, root cause analysis shows that the oversight by lenders must be focused, precise and undertaken with an independent questioning mind. As motor finance lenders are heavily reliant on third parties, some of whom ‘just want to make a sale,’ it is imperative that they issue instructions to ensure their suppliers behave in the same diligent way the lender itself would.

That means firms need to ensure that the third parties they rely on avoid harm to customers by:

• taking the right steps to ensure that they lend responsibly
• appropriately assessing whether customers can afford the finance
• managing conflicts of interest arising from commission arrangements
• providing information to customers in a clear, transparent, non- misleading way

Give us a call to see how we can help you improve governance, risk assessments and oversight within any lending sector.