Regulators issue warning over car finance claims

In the run-up to Friday’s Supreme Court decision, the Financial Conduct Authority (FCA) and the Solicitors Regulation Authority (SRA) have made public their concerns that law firms and claims management companies (CMCs) are providing inaccurate and misleading information to consumers about motor finance commission claims, warning they will take action if they discover evidence of poor practices.

“Law firms have a regulatory duty to act in the best interests of their clients. But if they mislead clients, fail to get their explicit consent, do not explain cost information clearly or are not sharing the required information on free alternative routes before signing them up, they are clearly failing to meet their obligations.”

Over the last year, the FCA has required 224 motor finance commission promotions to be amended or withdrawn. The SRA has 89 live investigations into 73 law firms, linked to potential breaches of its rules relating to high-volume claims work.

Supreme Court

The regulators’ warning was issued just 48 hours before the keenly-awaited Supreme Court judgment on three auto finance cases involving partial or complete failures to reveal brokers’ commission payments to customers. These have raised issues around commission disclosure, fiduciary duty and informed customer consent which have ramifications across the asset finance industry.

If, following the Supreme Court judgment, the FCA concludes motor finance consumers have lost out, the regulator has indicated it will consult on a free redress scheme for relevant motor finance customers.

The consultation is likely to take six weeks and consider a variety of “opt-in” and “opt-out” processes. Any scheme would set out rules for how claims should be assessed and calculated and would be easy for consumers to understand and access.

In their statement, the SRA and FCA said they expect law firms and CMCs to inform clients of the existence of a redress scheme, or where there is a realistic prospect of one being introduced, which would allow them to pursue a claim for themselves, free of charge. This must be done before a client signs any agreement with them. This applies even if the redress scheme has not yet been confirmed.

Both regulators highlight issues with CMCs or law firms charging customers fees if they decide to abandon their claim after the statutory 14-day cooling off period, as AFC has reported. They also point out that submitting a claim through a law firm or CMC can result in consumers sacrificing up to 30% of any award in fees.

Before entering into an agreement with potential clients, SRA rules require law firms to make consumers aware of their rights of termination under the agreement, and any fee that may be payable by consumers if they do not go ahead. Any charges that are applied by law firms or CMCs must be fair and reasonable.

The FCA’s rules require CMCs to inform customers of their right to exit the agreement at any time and any fee that may be payable by them. Any fee must be reasonable and reflect the work actually undertaken. 

Concerns

The FCA and SRA cite a number of concerns about the conduct of some law firms and CMCs, including:

• the volume and accuracy of marketing materials, and how information is shared or verified when clients are passed on from third parties
• a failure to advise consumers about the availability of free-to-claim alternatives
• law firms and CMCs providing inaccurate or misleading information on the likelihood of success or potential value of a claim.

Sheree Howard, Executive Director at the FCA, added: “We’ve seen law firms and CMCs advertising highly speculative figures, so we are warning them of our expectations when it comes to drumming up clients for motor finance commission claims. We will take action if we see evidence of poor practice.

“Consumers should be aware that by signing up now with a CMC or law firm, they may end up paying for a service they do not need and losing up to 30% of any money they may receive.”

Compensation

Financial analysts have revised down their estimates for the total compensation bill auto finance lenders could face following the Supreme Court decision.  RBC Capital Markets told the Financial Times that consensus estimates are now 20% lower than previously forecast, with analysts predicting that the Supreme Court is likely to overturn at least some of the arguments from the earlier Court of Appeal hearing.

For example, while an analyst at HSBC put the total compensation figure, including administration overheads, at £44 billion last year, and Moody’s suggested a £33 billion hit, RBC Capital Market’s latest estimate is £11 billion overall.

Edward Peck, Asset Finance Connect (AFC) CEO, commented: “The regulators are right to warn CMCs and law firms about their poor treatment of consumers – ironically, the very issue which is at the heart of the Supreme Court appeal.

“The asset finance industry is on tenterhooks waiting for Friday’s decision. We know that treating customers fairly is central to lenders’ and brokers’ daily operations, but the clash between regulatory requirements and common law has muddied the waters.

“Without clarity, there can be no action. That is why we at AFC, along with our legal partners Shoosmiths, are determined to support the asset finance community, with live coverage of the Supreme Court judgment and immediate reaction from our panel of industry experts.”

Don’t miss your chance to join the AFC/Shoosmiths webcast, sponsored by Odessa, for the first in-depth and independent analysis of the Supreme Court’s landmark ruling on commission disclosure in auto finance. The 90-minute session begins at 9am on Monday 4^th August and will feature expert insight from leading industry figures and legal professionals. Stay informed with a forensic breakdown of the judgment, its implications for compliance and redress, and what the industry should expect next. Secure your place now by registering here.