FCA issues update on auto finance redress scheme

The Financial Conduct Authority (FCA) has made clear that any redress scheme set up to tackle failures in commission disclosure on the part of auto lenders must “ensure the integrity of the motor finance market”, in the strongest signal yet that predictions for record payouts to consumers are likely to be wide of the mark.

The regulator has outlined its principles of redress ahead of the Supreme Court’s decision, expected mid-July, in relation to the appeal against last October’s shock Court of Appeal ruling regarding undisclosed commission. 

In March this year the FCA, which is also carrying out a review specifically focused on discretionary commission arrangements (DCAs), said that if, following the outcome of the Supreme Court judgment, it concluded motor finance consumers have lost out, it is likely to consult on an industry-wide consumer redress scheme.

The regulator will confirm within six weeks of the judgment whether it is going ahead with a redress scheme and publish details of the consultation process along with detailed proposals for how a redress scheme would work in practice alongside draft rules, including the proposed timings for when a redress scheme would be implemented, which is likely to be in 2026.

The FCA also said it would aim to make any scheme easy for consumers to understand and participate in, without needing to use a claims management company (CMC) or law firm.

Greater certainty

In a statement, the regulator explained it was providing the latest update “because we want to be able to act as quickly as possible once the Supreme Court has made its judgment, so we can start to bring greater certainty for affected consumers, firms and investors”.

In order to introduce any redress scheme, the FCA said it must appear there has been a widespread or regular failure to comply with requirements such that:

• Consumers have suffered (or may suffer) loss or damage for which a court would grant a remedy or relief, and ​
• It is desirable to establish a consumer redress scheme compared to other routes by which consumers could obtain redress.

Scheme principles

The regulator has set out its principles for designing any such scheme, which include supporting the ongoing, long-term availability of high quality, competitively priced motor finance. See diagram below:

The FCA is considering two different approaches. Under an opt-in redress scheme, customers would have to confirm to their firm by a certain date that they wish to be included, which the regulator says can be “challenging”, as some consumers may be unsure which firms they had agreements with.

Alternatively, under an opt-out redress scheme, customers are automatically included unless they opt out. The FCA says this is likely to be simpler for consumers and could reduce speculative claims. But for firms, it could be more expensive and take longer to implement, particularly if customers have changed address.

“Highly speculative” figures

As regards the size of any compensation payments, the FCA references what it calls “highly speculative figures” by some CMCs and law firms.  

Earlier this year, for example, a representative of Bott and Co, estimated the CMC had around 75,000 motor finance claims which could cost in excess of £100 million if the Court of Appeal ruling is upheld.

However, in its update the FCA cautions: “Some estimates have been calculated based on Financial Ombudsman decisions. We may take a different approach to calculating redress in any intervention we make.

“We’re required to take a broad view that takes into account all our statutory objectives. This will include considering all the evidence we’ve gathered and the Supreme Court judgment to determine whether and how far consumers may have lost out.”

Integrity of auto finance

The FCA goes on to note that any redress scheme must be fair to consumer who have lost out but must also “ensure the integrity of the motor finance market, so it works well for future consumers”.

The update concludes: “If many firms were to go out of business or withdraw from the market, this could reduce competition and could make it more expensive for consumers to borrow money to buy a car in the future. Where firms fail, customers may not get any redress, as motor finance isn’t covered by the Financial Services Compensation Scheme.”

The FCA is inviting feedback on the key principles used to design a redress scheme or aspects of its scope. Comments should be emailed to motorfinance@fca.org.uk