FCA: motor finance redress scheme to start next year

The Financial Conduct Authority (FCA) will announce its consultation on an industry-wide redress scheme to address motor finance mis-selling claims early next month, with expectations that a “critical mass” of compensation payments will be paid out in 2026.

Rathi told MPs that the FCA would be looking closely at the scope of any scheme, which will have discretionary commission arrangements (DCAs) as a focus, along with a smaller number of non-DCA schemes which reflect the issues raised by the recent Supreme Court judgement, notably around inadequate disclosure of commission, undisclosed ties with a single lender rather than a panel, and very high rates of commission.

Consultation design

Full details of the consultation, announced 48 hours after the Supreme Court ruling was handed down, will be published in early October. There will be a six week period for comment, with the aim that the framework for redress will be in place before the pause on consumer complaints about motor finance expires at the beginning of December.

“A key component of the consultation is deciding the operational details of the scheme. A number of firms are engaging very constructively with us because they want to move on and put this behind them, and we will be setting out deadlines for the timetable for the scheme,” Rathi stated.

These will include a firm end date by which consumers will no longer be able to bring a claim, which Rathi said was intended to avoid the kind of long drawn out process which characterised the previous mass redress scheme for PPI mis-selling.

FCA chair Ashley Alder said the aim was to offer better outcomes for consumers and firms than would be achieved via more court actions, with the associated delays, additional cost and uncertainty these would incur. “It’s important firms are able to quantify overall cost as quickly as possible, engage, and move on quickly,” he said.

Rathi said the expectation was that a “critical mass” of claims will be  settled in 2026, given that some consumers had made complaints via the Financial Ombudsman Service (FOS) or in the county courts, some considerable time ago.

However, he conceded that while the majority of the 38 firms that are affected by motor finance claims had engaged with the FCA, there was “a range of cooperation,” including representations from firms suggesting there was no need for a redress scheme. “We don’t have 100% cooperation at the moment but we hope to get there,” he said.

Under questioning from committee chair Meg Hillier, Rathi declined to make public the names of firms which were not cooperative, although he agreed to discuss the issues with her in private.  It would also be possible for firms to challenge elements of the FCA’s decisions on redress via judicial review, which would further delay payouts.

Size of compensation

Rathi emphasised that payouts are likely to be in the hundreds rather than the thousands. The Supreme Court judgment relating to the Johnson case represented the “high water mark” for the scale of any compensation, when the judges ruled the consumer should receive a refund of commission plus interest, although Alder cautioned that under legislation covering fair compensation rules, there may also be an economic loss component to be taken into consideration.  This is one of the issues the consultation will consider.

Sheree Howard, FCA executive director authorisations, emphasised that in cases relating to an “unfair relationship” between the consumer, lender and broker, decisions on compensation are likely to be highly “fact specific and fact sensitive”, with a range of indicators of unfairness.

Rathi noted “there is a degree of regulatory judgment involved and we will be making some pragmatic and proportional choices so as to be fair to all parties.  We need to both to compensate consumers and to ensure a healthy competitive lending market in the future.”

There will be an appeals process for consumers who feel they have not been treated fairly under the redress scheme, with any complaints handled by FOS.

Key issues

The FCA was clear that firms would need to be pro active in raising awareness among consumers about eligibility for compensation and how to access any scheme that is set up.  This may be an opt out scheme, which is more consumer-friendly as it requires no input from the individual, or an opt in scheme which places a bigger burden on consumers.

FCA executives were quizzed on why the regulator has chosen 2007 as the starting date for any claims, given the likelihood that lenders and brokers will not have retained all the paperwork from so many years ago.

Alder explained that “if scheme dates back to say 2014, then when we lift the pause on complaints, that could give rise to a potential situation of many claims still advancing in FOS and or the courts, which would mean less certainty for consumers and for firms. It could result in more cost, work, and general inconvenience than simply a scheme which dates back to when FOS had jurisdiction over consumer claims.”

Under this argument, the usual limitations on the timescales for making mis-selling claims are overridden by the deliberate concealment of facts relevant to the contract, such as commission, which means it is possible to back further in time than is usual.

Howard argued that while the further back claims go, the sparser the data available, it was a “mixed picture”, and the FCA’s view is that quite a big proportion of firms are able to find reasonable data, and can work with third parties like credit reference agencies to supplement this.

The FCA is set to come under more pressure over timescales and data challenges from the House of Lords financial services regulation committee, which has put in a request for Rathi to appear before them this month to explain the FCA’s thinking in more detail.

“Yet in a Treasury select committee hearing, its chief executive labelled some lenders as unco-operative without giving clear details of the basis for this description or if there is an opportunity for the lenders to explain their stance. The chair of the committee is asking for these lenders to be named in a private conversation, and potentially shamed.

“Now is the moment for regulators, lenders, brokers and the wider asset finance community to collaborate to improve outcomes for consumers, rather than adopt adversarial positions. Lenders need to engage with the FCA, and the FCA needs in turn to welcome engagement even when they don’t agree with the points being made. What happens next on both sides will determine whether customers get value, workable remediation, and systems which prevent harm and encourage good practice.

“At AFC we will be providing in depth coverage of developments and expert webinars on the next steps.”

 Listen to the Treasury selection committee session.