FCA confirms mass motor finance redress scheme on the table

The Financial Conduct Authority (FCA) is set to introduce an industry-wide redress scheme if next month’s Supreme Court hearing concludes that motor finance customers have lost out due to lenders’ failures in commission disclosures. While this will initially focus on the past use of discretionary commission arrangements (DCAs), the regulator says its next steps on non-DCA complaints will also be informed by the outcome of the case, opening the way for substantial claims against lenders.

In a statement published three weeks ahead of the Supreme Court hearing, which is scheduled for 1-3 April, the FCA confirmed that “if, taking into account the Supreme Court’s decision, we conclude motor finance customers have lost out from widespread failings by firms, then it’s likely we will consult on an industry-wide redress scheme.”

Previously, the FCA had indicated it was planning on issuing a further announcement in May on the progress and outcome of its motor finance DCA review, which started in January last year, but that is no longer happening.

Instead, the regulator will move straight to considering a redress scheme, whereby firms would be responsible for determining whether customers have lost out due to the firm’s failings. If they have, then firms will be required to offer what the FCA calls “appropriate compensation”, with the regulator setting rules for firms to follow and checking that they do as required.

 “A redress scheme would be simpler for consumers than bringing a complaint. We would expect fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive. It would also be more orderly and efficient for firms than a complaint led approach, contributing to a well-functioning market in the future,” the FCA stated.

The FCA said that its actions regarding non-DCA complaints will also be informed by the outcome of the Supreme Court case, and it may also consult separately on changes to its rules.

How much is at stake?

There is considerable variation in analysts’ estimates of how much any compensation scheme would cost motor finance lenders, although the numbers have been moving upwards since October’s Court of Appeal decision – the subject of the Supreme Court appeal – which goes wider than DCA issues to consider broader examples of failures in commission disclosure. 

While credit ratings agency Moody has suggested a £30 billion bill is in prospect for the motor finance sector, analysts at HSBC have estimated banks could face paying out as much as £44 billion, making any redress scheme the biggest of its kind.

Last year Jyrki Kolsi, economist with professional services firm BDO analysed three different potential scenarios:

1. Remediation based on excess interest costs that customers may have been subject to because of broker incentives from DCAs. This is the basis that the FCA used to estimate consumer harm in its 2019 Consultation Document and how the FOS has approached remediation so far. Assuming that loans would be eligible for remediation under this scenario if they were originated during the FCA’s 2007 – 2021 window (even if the excess interest costs were suffered later), the aggregate exposure by the sector could be up to £13.6 billion.
2. Remediation based on return of commission payments made by lenders to dealers/brokers under DCAs. If the period subject to remediation runs from 2007 to 2021, and not accounting for changes in size of market or level of commissions during the period, the exposure to remediation based on return of DCA commissions paid across the sector could vary between £9.8 billion and £19.7 billion, including interest.
3. Remediation based on return of commission payments made by lenders to dealers/brokers under any not-properly-disclosed commission arrangements (which was part of the focus of the Court of Appeal judgement). For the period 2007 – 2021 that would mean total exposure of £13.6 billion to £27.3 billion, before interest; and this could increase if the period extends to 2024, given that many lenders updated their procedures in relation to disclosure and consent after the October Court of Appeal judgment.