The UK’s financial watchdog has told banks they must maintain adequate financial resources to cover costs associated with increased consumer complaints about historic car finance commission arrangements.

In 2021, the Financial Conduct Authority (FCA) banned certain commission arrangements which gave brokers an incentive to hike the interest rate that consumers pay for their motor finance.

Since then, there have been a high number of complaints from customers claiming compensation for these discretionary commission arrangements (DCA) which were issued prior to the ban.

Firms have been rejecting most complaints because they say that they have not acted unfairly or caused their customers loss based on legal and regulatory requirements.

But in January the FCA decided to open a review of historical commission arrangements after several complaints initially rejected by firms were found to be legitimate by the Financial Ombudsman Service.

This includes a complaint made to Clydesdale Financial Services Limited, which trades as Barclays Partner Finance.

The hike in complaints will likely be compounded by last week's commencement of judicial review proceedings relating to DCAs at Barclays, which the FCA says has "generated some uncertainty" for both consumers and firms.

The regulator said that banks should "plan for any additional operational costs from increased complaints and, where applicable, to meet the costs of resolving those complaints".

"We expect you to analyse the impact of making any capital reduction, such as dividend payments, on your firm’s ability to meet potential future liabilities that may arise from historic use of DCA arrangements," wrote Roma Pearson, FCA director of consumer finance, in a letter to UK lenders.

She also said that if the organisation finds there has been widespread misconduct and consumers have lost out, it will identify how best to make sure people receive an appropriate level of compensation.

But the FCA has been struggling with a delay on necessary data from firms. It said that this has been driven by data being stored on multiple systems or being spread between lenders and brokers.

In some older cases, firms have not retained all relevant records.

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