FCA mulls reforming redress framework

The Financial Conduct Authority (FCA) has acknowledged that the delays and confusion around determining whether it will introduce a compensation regime for car finance commission complaints have hit business and consumer confidence, and indicates that in future it plans to improve its relationship with the Financial Ombudsman Service (FOS) and reform its approach to its redress framework.

The remarks are contained in a letter from the FCA to Sir Keir Starmer, responding to the Prime Minister’s challenge to regulators to demonstrate a new approach to ensure regulators and regulations support growth, which is a key government objective.

However, Rathi also concedes that the timing of the announcement is not entirely within the regulator’s control, given the other legal and regulatory bodies involved, noting this is “subject to Supreme Court and other legal timetables.”

He goes on to state: “We can never rule out firms having to pay redress for serious misconduct. However, through proactive management of issues, and improved coordination with the Financial Ombudsman Service, we aim to prevent further significant FCA-led consumer redress exercises. As part of that, we are considering reforms to the redress framework which may need legislation.”

How much?

The uncertainty around possible outcomes from the current FCA motor finance review has hit the share values of lenders with significant exposure to the sector, including Close Brothers and Lloyds, while the requirement to hold capital in reserve in case of future compensation demands has dampened innovation.

Currently the Supreme Court is expected to hear the appeal against in the Court of Appeal ruling in Wrench vs FirstRand and two other linked cases over three days, beginning 1 April. However, it is not known how soon judgment will be handed down after the hearing.

The FCA has previously said that May 2025is the date it plans to set out next steps in its review of discretionary commission arrangements (DCAs), which began in January 2024, and provide an update on motor finance non-DCA commission complaints, but has conceded that “given the Court of Appeal’s judgment affects both types of complaint, what we can say in May will depend on the progress of the appeal to the Supreme Court and the timing and nature of any decision.”

Estimates of the likely financial hit for lenders found to have failed to adequately disclose commission payments vary considerably, with credit ratings agency Moody’s suggesting lenders could face an overall compensation bill of as much as £30 billion.

• Scenario A: 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.
• Scenario B: 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.
• Scenario C: 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.

Regulatory streamlining

Additional steps to reduce the regulatory burden outlined in the FCA letter including removing the need for a Consumer Duty Board Champion now the Duty is in effect, and also ensuring future consultations on consumer protection ask if the Consumer Duty is sufficient rather than new rules.

Rathi also points out that the Treasury began modernisation of the Consumer Credit Act in 2022, saying that if a review of the now 50-year-old legislation was accelerated, “we could reduce burdens further and faster.”  

Last autumn, the FCA and FOS launched a Call for Input on ways to update the redress system, noting that it was ten years since the Dispute Resolution (DISP) rules were reviewed, since when there has been a spike in mass redress events and an increase in the number of complaints brought by professional representatives.

The consultation, which closes on 30 January, includes a section addressing what FOS calls “a perception among some industry stakeholders of misalignment between the FCA and the Financial Ombudsman on the interpretation of certain FCA requirements.”

“But as the FCA points out, certainty and predictability are essential but have been lacking in the motor finance industry for some time now. The range of potential compensation calculations serves to underline how difficult it is for lenders and brokers to navigate a way through the current confusion.

“Clarity is essential, and AFC will continue its programme of expert webinars, conferences and events throughout the year providing the motor and asset finance industry with informed opinion on the developing challenges.”