Motor redress scheme open to question

Significant concerns remain about the Financial Conduct Authority’s motor finance redress scheme, which sees compensation scope and costs revised downward from the original consultation, but leaves open questions about the timeline for payouts, eligibility criteria and the potential for legal challenges to the way in which claims are assessed.

“What we wanted to see was a responsible, workable announcement that genuinely draws a line under the commissions issue, restores regulatory certainty, and protects the future investability of the sector so that competitively priced motor finance remains available for customers in the years ahead.

 “While the FCA has clearly endeavoured to make the redress scheme more proportionate than the proposed scheme consulted on in October, it will take time for us to assess the market impact of the measures announced today.”

“There has been lots of sensible fine tuning, ranging from the removal of interest free loans from scope through to no longer enforcing recorded delivery of all consumer letters. Also, the overall cost burden is estimated to be almost £2bn less and this is not inconsiderable. It could even be viewed as a reasonable win.” 

Rachael Jones, Director of Automotive Finance at Autotrader, agreed that the FCA has shown a “pragmatic and proportionate approach……that strikes the right balance between ensuring robust protection and transparency for consumers, while underpinning the stability of an automotive sector that contributes billions to the UK economy every year.”

Compensation

One of the changes in the scheme since consultation is that agreements involving minimal commission or zero APRs will not receive redress. Where a lender can prove there were visible links with a manufacturer and dealer, a contractual tie alone will not trigger compensation. 

However, it is far from certain how such agreements will be assessed as Tew points out: “There are big unknowns of which the rebuttal of tied relationships could prove to be a messy area. Relationships between dealers and lenders can be complex, including not just motor finance but stocking loans, for example, and proving that any links have been disclosed to the customer could involve evidencing from both dealer and lender. Finding this proof could even be used by dealers as a means of asking for indemnification from lenders against any future clawbacks of commission.”

Furthermore, consumer groups and, in particular, claims management companies (CMCs) argue that compensation payouts should be larger than the predicted average per agreement.

“The final rules, published by the FCA, maintain average redress to be £829 per claim and a total redress bill for lenders of about £9bn. CMCs are claiming it should be almost double at £1,500 per claim. It’s estimated around a third of potential claimants are signed up with CMCs, leading to a potentially higher redress bill of about £12.4bn in our view,” Barnwell said.

Claims law firm Courmacs Legal, for example, has labelled the scheme a “complete failure for consumer rights” which “prioritised lender balance sheet over vulnerable motorists” and is urging consumers to bypass the regulator’s scheme and take claims to court.

This is a point tackled directly by FLA CEO Amarasekara, who said: “We have always been clear that where consumers suffered loss, redress must be paid. But any redress scheme for a market of this size must accurately identify and compensate only those customers who genuinely suffered loss. If it is drawn too broadly so that it also compensates customers who suffered no loss, the only real winners will be Claimant Law Firms and Claims Management Companies – and that cannot be the regulator’s intention considering that it has today had to launch a multi-organisational taskforce in an attempt to address the conduct of claimant firms operating in the motor finance market.”

Challenges

There are other possible grounds for a legal challenge, this time from lenders who have long indicated their unhappiness that agreements going as far back as 2007 are under the microscope. The FCA has, unusually, announced that the redress scheme will be split into two parts, covering pre and post 2014 agreements.  

Barnwell explained: “The FCA have not changed much of the fundamentals of the redress scheme. The population of customers in scope has been tweaked to reduce the estimated number likely to receive redress at 12.1 million. This is down from previous FCA estimates of 14.2 million. However, for lenders with pre-2014 books of business, redress figures look likely to be higher than the average because of the way redress will be calculated.”

In response, lenders or other interested bodies, could launch a legal challenge to some elements of the design of the redress scheme, and have until 27 April to do so. Such a move would potentially delay payouts, something which could prove problematic for the FCA which has emphasised its desire for a speedy conclusion to the issues.

“Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure. Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.”

Of the lenders with large exposure to historic motor finance agreement claims, only Close Brothers has made a statement to the market that the group “is assessing the potential implications of the redress scheme on the group. The group will update the market as and when appropriate.”

Finance Connect is hosting a webcast, sponsored by Odessa, on 2nd April at 9:30am to explore and examine the FCA motor finance redress scheme and outline what steps you should take next. Register now to secure your place.