The FCA has published its much-anticipated consultation on the industry-wide motor finance redress scheme. This follows the Johnson Supreme Court ruling and the Clydesdale case (one of the original FOS decisions which subsequently went to court) which found that customers had been treated unfairly. The FCA believes that a scheme is overall more efficient than millions of complaints going through complaints processes, FOS, or the courts. It has again reminded people that they don’t need to use a law firm or Claims Management Company (CMC) and could lose 30% of their redress to them if they do.
It is a lengthy 360-page document plus supporting documents, but these are the headlines.
The FCA estimates around 14 million agreements, being 44% of agreements made since 2007, will be considered unfair, with the scheme costing industry approximately £11bn (comprising £8.2bn in compensation, and £2.8bn in implementation costs). The average redress per affected finance agreement will be around £700.
Inevitably, given the scale and complexity of such a scheme and limitations in the data the FCA has spanning such a long time period, the estimates remain highly indicative and susceptible to change.
The FCA says that firms failed to disclose important information, such as the existence and nature of commission and contractual ties between lenders and motor dealers. A relationship would be considered unfair where it involves inadequate disclosure of one or more of the following:
-
a discretionary commission arrangement (“DCA”)
-
high commission (where the commission is equal to or greater than 35% of the total cost of credit and 10% of the loan)
-
contractual ties that gave a lender exclusivity or a right of first refusal.
The FCA acknowledges that there may be circumstances where firms can rebut the above, but expects these to be limited, such as where the motor dealer selected the lowest APR under a DCA.
The scheme would cover regulated motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable by the lender to the broker. The selection of these dates, especially the earlier one, is interesting and will get a lot of response and criticism in the consultation. Even though the FCA only took on the regulation of consumer credit from the OFT in April 2014, FOS could adjudicate on consumer credit cases from 6 April 2007. There is not a time bar (although a 10 year one is being considered in current consultations on modernising the redress system) as it is usually 6 years, although critically here, or 3 years of being aware of the issue.
If the FCA ran its scheme from say April 2014, then customers (or more likely law firms and CMCs) would still complain about cases in the period 2007 and 2014, continuing to clog up firms’ complaints operations, FOS, and the courts. Thus, the FCA believes that overall, it is more cost effective to have as much as possible in the scheme. The later date of 1 November 2024, which is strange on the face of it as DCAs were banned by the FCA in January 2021. However, the Johnson case was not a DCA, and 1 November 2024 is about a week on from the Appeal Court rulings last autumn that led to the motor finance market moving to full disclosure of the commission amount. This is an endorsement of that approach in that the FCA is now happier with the functioning of the motor finance market.
Obviously, going back to 2007, the FCA acknowledges that firms may not have the documentation, but nonetheless expects them to try and recreate this. Where the documentation is not there the customer should be given the benefit of doubt. The FCA is proposing to structure the scheme mainly on an opt-in basis, with firms having to write to all affected customers, even though the FCA thinks only 44% of agreements are eligible for compensation, and where firms don’t think any of the above 3 points applied. This will be another area of pushback in the consultation. Those 4 million complaints already with firms will be treated as being in the scheme unless the customer opts out. The FCA will also be running an advertising campaign to make people aware of the scheme.
The FCA is making lenders responsible for administering the scheme, but brokers such as motor dealers should help them, such as by providing missing information if possible. It has sent lenders and brokers a “Dear CEO Letter” emphasising how important this all is. Given its remit, the FCA’s focus is on the customers getting their redress, and not whether lenders can recover this from motor dealers.
From its analysis the FCA believes that because of the agreements in place, the APRs charged to customers were too high by around 17%. So, for example, they are saying an APR of 10% should have been 8.3%.
Redress is proposed to be calculated for each affected agreement using what the FCA is calling a “hybrid method”, being the average of the commission paid to the motor dealer and the overpaid interest using the above adjusted APR. Interest will then be added based on the annual average Bank of England base rate per year plus 1%, from the date of overpayment to the date compensation is paid. There are also protections to ensure that this adjusted APR can’t go below the minimum APR that the motor dealer could have charged under the DCA and where the customer has settled the loan early.
This methodology results in a lower redress amount than that in the Johnson case where all the commission paid to the motor dealer was refunded plus interest and the “thousands of £s” that law firms and claims management companies (“CMCs”) have been advertising and pushing. On this latter point the FCA has got together with other regulators such as the SRA, ICO and ASA to make sure that law firms and CMCs behave and are complying with the various rules, and the FCA has sent the CMCs their own “Dear CEO” letter. The FCA believes that Johnson was a more extreme case, with the motor dealer’s commission being 55% of the cost of credit and 26% of the loan amount and a non-disclosed first refusal agreement with a lender. Where cases are like this the redress will be the full amount of commission plus interest. The FCA also recognises that some lenders may wish to short circuit the process and just pay the full amount of commission plus interest to settle and avoid all the admin costs of going through the process of the scheme.
The consultation press release recognises the tricky balancing act that the FCA is under to keep all the stakeholders happy.
As Nikhil Rathi said, “We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated. On such a complex issue, not everyone will get everything they would like. But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”
Already you can see the polarised views on this below, which will make for an interesting consultation! However, I think the FCA is trying to batter all the parties into submission by the weight of and evidence in the consultation paper and positioning this as a done deal!
The Finance & Leasing Association said, "At first glance it does look to us like the FCA is overcompensating here. We don’t recognise losses on that scale.”
Whereas the lawyer in the Johnson case said, “Mis-selling victims have been treated unfairly for a second time with these proposals.”
Martin Lewis said he hoped lenders would not fight against the regulator’s proposals. “If they want clarity, then don’t fight this. Let’s all move on.”
The consultation is only open for a short time until 18 November 2025 with the FCA planning to publish a policy statement in early 2026. The scheme would launch at the same time, with consumers starting to receive compensation later in 2026. This does not give lenders long to respond nor to set up systems and operations to deal with the huge volume of transactions, but the FCA feels that firms have had adequate notice that this was coming and should start now, if they haven’t already, and not wait for the policy statement to come out.
Complaints outside of the scheme should be handled in the normal way.
ITC will continue to study the lengthy document and may respond to the consultation. We, as we expect some of you who were directly authorised for consumer credit in the relevant period, have received the FCA’s Dear CEO letter. The important thing for the moment is to maintain documentation and be ready to deal with lenders requests for missing information. If you wish to discuss any of this, please do not hesitate to get in touch with your usual ITC contact.