Credit, Collections & Insolvency News
Motor finance customers are likely to receive less than £950 in compensation after the Financial Conduct Authority (FCA) announced it will consult on an industry-wide compensation scheme.
Many motor finance firms were not complying with rules or the law by not providing customers with relevant information about the commission paid by lenders to the car dealers who sold the loans.
The FCA has moved quickly on steps to set up a proposed compensation scheme because it wants to provide clarity and certainty to consumers, firms and investors as quickly as possible. It says that it also wants to ensure the integrity of the motor finance market so it works well for consumers now and in the future. The compensation scheme would balance principles including fairness, timeliness, and certainty.
The announcement follows Friday’s landmark ruling by the Supreme Court on cases in which the FCA had intervened. While some motor finance customers won’t get compensation because in many cases, commission payments were legal, the Court ruled that, in certain circumstances, the failure to disclose commission arrangements properly could be unfair and therefore unlawful.
The FCA will propose rules on how lenders should consistently, efficiently and fairly decide whether someone is owed compensation and how much. It will monitor if firms are following the rules and act if they’re not.
The FCA currently estimates that most individuals will probably receive less than £950 in compensation.
The final total cost of any compensation scheme will depend on the final design. That makes it hard to estimate precisely. Any estimates are only indicative at this stage and may change. The FCA thinks it is unlikely that the cost of the scheme, including running it, would be much lower than £9 billion. And it could be higher, up to £18 billion in some scenarios, though the FCA doesn’t believe these are the most likely. A total cost midway in the range, as forecast by some analysts, is more plausible.
The consultation will launch by early October. If the compensation scheme goes ahead, the first payments should be made in 2026.
Nikhil Rathi, chief executive of the FCA, said “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.”
“Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get. It will take time to establish a scheme but we hope to start getting people any money they are owed next year.”
People who have already complained don’t need to do anything. Consumers who are concerned that they were not told about commission and think they may have paid too much for their motor finance lender should complain now. Consumers do not need to use a claims management company or law firm and doing so could cost them around 30% of any compensation paid.
Commenting on the Supreme Court judgment on motor finance commissions, Stephen Haddrill, Director General of the FLA, said “This judgment is an excellent outcome. It properly reflects the role and responsibilities of dealers, lenders and customers, and it has restored certainty and clarity to the largest point-of-sale consumer credit market in the UK. In addition, it has also restored confidence to the sector, confirming that it remains a solid investable option – which in turn means the supply of affordable motor finance will continue for customers.
“Cars are an essential part of UK life – and for many people, relying on a car means relying on motor finance. It’s a product that’s trusted and valued by our customers – just over 80% of new cars are bought on finance, as is a large percentage of used cars.
“The FCA now has the legal clarity to continue its work to establish if a redress scheme is needed, and of course the thousands of unfounded complaints submitted to lenders by claimant law firms and CMCs can now be removed from the system.”
Paul Hollick, Chair at the Association of Fleet Professionals, said “We’ve gone from a situation on Friday where the Supreme Court verdicts suggested the worst risks for the motor finance sector had been removed, to one on Monday morning where the FCA’s intervention has reintroduced the possibility of quite widespread reparations. It means we’re going to remain in a situation of considerable uncertainty until the redress scheme is finalised, with that six-week process starting in October.
“The risks for the fleet industry here are twofold. If banks and motor finance companies are forced to pay billions in compensation to consumers, it’ll potentially have a knock-on effect on the availability and cost of finance to fleets. Also, if it becomes more difficult for used car buyers to access finance, it means there could be an impact on residual values, which is also bad news for fleets.
“We’d like to see the whole situation resolved as soon as possible. Yes, consumers whose legal rights have been ignored should be recompensed fairly but the motor finance market also needs to return to normal functioning as soon as possible.”
Brian Nimmo, Head of Redress at consultancy Broadstone said “This ruling is a partial win for a motor finance industry which will be breathing a huge sigh of relief.
“However, providers are not out of the woods yet as DCA cases will now need to be looked at on a case-by-case basis. The FCA is expected to develop its redress scheme to deal with this development but how it will help them decide if a case is ‘unfair’ is the great unknown.
“As a result, finance companies will still need to review all of their DCA cases, assess whether they are unfair and then calculate potential redress, which will be a significant exercise.”