Update on auto finance redress scheme at Finance Connect Conference

The Financial Conduct Authority (FCA) consultation on an industry-wide redress scheme for motor finance mis-selling claims ends on 12 December, and lenders need to be prepared to act swiftly once the regulator issues its final policy decision, despite the difficulties of collecting the necessary data.

That was the key message from a Finance Connect conference session which summarised the long road via a series of legal challenges and rulings (see timeline below) to the current state of play, where lenders and brokers are keenly awaiting the outcome of the FCA’s deliberations compensation arrangements.

Panellists at the session noted the strong feelings that the legal and regulatory rulings have prompted within the industry, particularly as many lenders maintained they were acting in accordance with the regulatory guidelines in force at the time agreements were made.

Wayne Gibbard, Shoosmiths partner and Finance Connect’s legal partner, agreed that the Court of Appeal’s decision marked a “seismic shift”, while the “scale and reach” of the FCA’s redress plans have also come as a surprise.

“We moved from Friday evening when Lord Reid navigated a difficult, highly charged set of arrangements with multiple stakeholders to provide a very clear decision and clear path forward, only to find 36 hours later the FCA planning a redress scheme with costs running into the tens of billions,” Gibbard pointed out.

But the focus of the conference session was to look forward and equip lenders and brokers to respond after an unusually short FCA consultation of just eight weeks.

Any redress scheme which takes 2007 as its starting point, as the FCA has indicated it intends to do, is a significant challenge, with all panellists agreeing it will be hard for lenders to locate data from 17 years ago.

The most immediate and obvious problem lies in finding documentation for agreements taken out decades ago, which may require searching archives for paper documents. In addition, some consumers will have taken out several agreements over the years with the same or different lenders.

“Someone who’s had finance on a number of vehicles could receive several letters with different calculations, different explanations and different response requirements. That is going to make clear communication very important,” Gibbard said.

Secondly, the redress calculations are likely to be quite complex, which may result in the need for further communication or negotiation.  In some cases, for example where a captive funder offered a 0% finance deal – but a commission was involved and not disclosed – it will be difficult to establish how the customer suffered any loss.

In any event, Gibbard underlined the need for lenders to commit resources now, particularly as the redress scheme looks set to capture a very large number of agreements. “A number of lenders, especially if they did not take on non-prime consumers, there were no DCAs or ties, and no secondary funder may, by their nature, have very few or no cases in scope. Yet they will be required to identify and trace and write to customers to ask if they wish not to participate in the redress process.”

Finally, Gibbard cautioned that lenders will need to be primed to act quickly once the scheme is live. The FCA has extended its consultation deadline to 12 December, but is still indicating the outcomes and the redress details will be published in February or March next year.

“The implication is that on the day after the issue of the policy statement the scheme will go live, such is the urgency and desire to bring this to a close. However, that is a very aggressive timetable to reach out to consumers and make payments – potentially little more than four months,” he warned.

It is of course possible that one or a group of lenders may launch a judicial review, but the panellists’ view was that the FCA is committed to drawing a line under motor finance claims, so is likely to seek to make the redress scheme the final step.

As David Betteley, head of the Finance Connect auto finance community put it: “ The FCA is aiming for as simple as possible a scheme, and that can make for some perverse outcomes.”

As to the final outcome for the sector as a whole, Gibbard pointed out “one of the beauties of this market is its diversity, but the redress scheme is a huge distraction and some lenders may feel that it’s simply not worth staying in the market if this kind of retrospective action is possible.”  There is also the chance that claims management companies may launch fresh claims around failure to meet redress requirements, or different elements of legal rulings.

But Rachael Jones, director of automotive finance at Auto Trader, argued that the market was seeing positive signals for the future. There was agreement amongst the panel that consent letters, brought in at speed following the Court of Appeal decision, are here to stay and, as Jones put it “provide transparency and help build trust.”

“And we have seen no dip in users coming on to our site and using the finance calculator as they look for cars – news of the redress scheme has not changed buying patterns which are very stable,” Jones explained.

Indeed, the one point on which lenders and the FCA are likely to agree is the need to find a conclusion to what has become a lengthy, expensive and distracting exercise.

Timeline

2010: Office of Fair Trading (OFT) issues irresponsible lending guidance

2014: Financial Conduct Authority (FCA) issues detailed rules for consumer credit firms, which mirror OFT guidelines

2014: Supreme Court ruling (Plevin v Paragon Personal Finance Ltd) establishes that undisclosed commission on a PPI policy, which made up more than 50% of the premium, created an “unfair relationship” between the lender and the consumer

2017/18: FCA announces a review of the motor finance market

2019: FCA final report on its review finds “commission arrangements..operating in motor finance may be leading to consumer harm on a potentially significant scale”

2021: FCA bans discretionary commission arrangements (DCAs) and makes changes to CONC 4.5.3 regulations on commission disclosure

2021–2023:  Large volumes of motor finance claims appear in county courts across the UK and are made to the Financial Ombudsman Service (FOS)

2024: Three cases (Hopcraft, Wrench and Johnson) go to the Court of Appeal, which rules that it was unlawful for car dealers to receive a commission from a lender providing motor finance to a customer, unless it was properly disclosed to the customer and they gave informed consent to the payment. The Court also finds dealers have a “fiduciary duty” to consumers

2024: Barclays subsidiary Clydesdale Financial Services loses a judicial review of a FOS decision relating to a DCA motor finance case; a subsequent appeal is abandoned following a later Supreme Court ruling

2025: Supreme Court overturns much of the Court of Appeal’s decision, and challenges the idea of a fiduciary duty between dealers and consumers; but the Supreme Court does agree that in one case, the excessive rate of commission and failure to disclose amounted to an unfair relationship under the terms of the Consumer Credit Act