FCA launches motor finance redress scheme

The FCA estimates that the total bill to firms could reach £9.1 billion, consisting of redress costs of £7.5 billion and non-redress costs of £1.6 billion.

The introduction of the scheme follows the Supreme Court's judgment in Johnson v FirstRand Bank, Wrench v FirstRand Bank, and Hopcraft v Close Brothers, which significantly limited the scope for so-called "secret commission" claims based on fiduciary duty and bribery, but left the door open to claims centred on unfairness within the meaning of section 140A of the Consumer Credit Act 1974. For further details of the Supreme Court's judgment, please see our previous article here.

Changes to scope of the scheme

Following consultation, the FCA has made several changes to the scheme that were not previously included in its initial proposal. In particular:

Agreements involving minimal commission or zero APRs will no longer qualify for redress.
Where a lender can prove there were visible links with a manufacturer and dealer, a contractual tie alone will not trigger compensation.
The threshold for high commission cases has been raised to at least 39% of the total cost of credit (up from 35%) and 10% of the loan.
The FCA has adjusted how compensation is calculated to better reflect greater losses between 2007-2014.
In around 1 in 3 cases compensation will be capped to ensure that consumers are not put back in a better position than they would have been had they been treated fairly.
Changes have been introduced to streamline the scheme in an effort to ensure that consumers are compensated quickly (the FCA anticipates that most consumers will be compensated by the end of 2027).
Lenders will only need to contact complainants or those due compensation and recorded delivery will not be required.
Consumers who have successfully complained to the Financial Ombudsman Service (FOS), had their claim determined by a court or accepted redress will be excluded from the scheme.
Claims for high value loans (higher than 99.5% of loans that year) are excluded (however consumers can still complain to their lender and the Financial Ombudsman).

As a result of these and other changes, the FCA estimates that 12.1m agreements will fall within the scope of the scheme (down from 14.2m at consultation).

The scheme has also been split into two tranches, and the FCA will (in effect) be implementing two schemes. The first covers the period 6 April 2007 to 31 March 2014 and the second covers the period from 1 April 2014 to 1 November 2024. In taking this approach, the FCA has said that if "the earlier period is subject to legal challenge, redress for consumers with agreements form April 2014 shouldn't be delayed."

Pre-2014 agreements

To address industry concern that pre-2014 data is limited, and to avoid the risk of firms collecting data delaying compensation for consumers, the FCA has announced that for the period 6 April 2007 - 31 March 2014 an APR adjustment of 21% will be applied. The FCA estimates this will results in an increase to average redress of £31 for pre-2014 agreements.

Implementation

For agreements taken out from 1 April 2014, firms will have until 30 June 2026 to implement the scheme and a further 3 months from the implementation date to contact complainants.

For pre-2014 agreements a slightly later implementation date of 31 August 2026 applies, with firms again having 3 months from that date to contact complainants.

Compliance

The FCA has warned that it will intervene if firms fail to comply with scheme rules, using its enforcement powers if necessary. A joint taskforce with the Solicitors Regulation Authority, Advertising Standards Authority and the Information Commissioner’s Office has also been set up to tackle poor handling of motor finance claims by some claims management companies (CMCs) and law firms.

Commentary

The FCA has been very keen to stress, via its "£1 million" awareness campaign that consumers do not need to engage CMCs or law firms to access the redress scheme. The FCA is clearly concerned that this will result in a reduction to the compensation due to affected individuals and has even posted several Instagram videos answering key car finance questions and explaining what consumers should do if they have already signed up with a CMC or law firm and want to cancel, as part of its campaign. The message has been, in effect, let the redress scheme (or direct complaints) work it out.

We also note that the FCA had over 1,000 consultation responses from a wide range of parties including consumer groups, manufacturers, investors and industry bodies and refers in its announcement of the split scheme to the fact that its power to include agreements before 2014 was questioned by some respondents. The FCA also goes on to say that the earlier period may be subject to legal challenge on those grounds. As a result, the pathway for redress relating to pre-2014 agreements may not (still) be wholly clear.

If you would like to discuss the impact of the scheme in more detail (including issues relating to commission arrangements and/or "secret commissions" claims more generally), please get in touch with Terence Dickens or with Gena Ritchie.