FCA issues update on potential redress scheme

The Financial Conduct Authority (FCA) has issued a further update on the key considerations for a potential redress scheme, which would set rules for how firms assess claims and calculate redress, and also put checks in place to ensure they are following the rules.

The FCA stressed that the integrity of the motor finance market is essential for future consumers. A Supreme Court ruling this summer will determine if banks unlawfully paid commissions to car dealers without customer consent. Should the ruling be unfavourable for lenders, the FCA plans to implement a redress scheme within six weeks, but said it must not jeopardise businesses or reduce competition.

Before January 2021, some motor finance lenders allowed brokers (usually car dealers) to adjust the interest rates on financing deals offered to customers. The higher the interest rate, the more commission the broker received. This was known as a discretionary commission arrangement (DCA), and the FCA banned this practice in the motor finance market in 2021.

There have since been a high number of complaints from customers about firms failing to disclose details about commission arrangements before the ban. Firms rejected most of these complaints, because they believed they hadn’t acted unfairly and hadn’t caused customers to lose out.

The Court of Appeal decided that, in the circumstances of three cases, it was unlawful for car dealers to receive a commission (whether discretionary or a fixed percentage) from lenders providing motor finance without giving the customer sufficient information about the commission and getting their informed consent to the payment.

Darren Richards, Head of Broadstone’s Insurance, Regulatory and Risk Advisory division, said “The update this morning from the FCA sets out some of the key decisions it is grappling with when it comes to implementing a redress scheme to deal with motor finance compensation. It is clear that the decisions behind the design of a redress scheme are complex and need to balance fairness for consumers and the integrity of the motor finance market.

“The FCA highlights some key issues around opt-in and opt-out approaches, which will change the volume of complaints dealt with. It also warns that the redress approach may differ from decisions made by the Financial Ombudsman service which some firms have taken as a benchmark for their planning.

“The message is that clear that preparation should continue – but executing redress will require consultation and there is a waiting game until the FCA concludes this process and provides details of the redress scheme.”