The Financial Conduct Authority (FCA) recently implemented a new redress scheme. This move aims to hit the historic car finance mis-selling scandal which has affected millions of drivers across the UK. This new proposal seeks to make consumers whole. They were systematically overcharged as a result of a sketchy practice involving lender-dealer commission arrangements that go back to 2007. The FCA thinks that the total cost of the scheme may be in the range of £9 billion to £18 billion. As they demonstrate by being the first to start untangling this vexatious matter.
Motorists Compensation for many motorists will end up being less than £950 per claim. The decision to limit compensation to around £2.2 billion is based on findings that customers were overcharged approximately £165 million annually between 2007 and 2020.
Nikhil Rathi, the FCA’s chief executive, already indicated that the regulator is prepared to go further. They are confident that they have sufficient information now to design a redress scheme. He confessed the complexities at stake, noting that every individual case will be looked at on a case-by-case basis.
“There’s some detail to be worked out, and we’ll have to look at this on a case-by-case basis … but we think we have enough now to put in place a scheme. And of course, what we have found in our review is that many firms broke the law and our rules around disclosure: they didn’t disclose commissions. And so in those cases, where consumers have lost out, it’s important that there’s appropriate compensation.” – Nikhil Rathi
The scandal involves these DCAs—discretionary commission arrangements. Following an intense year-long examination, regulators banned these arrangements in 2021. These practices enabled dealers to set commissions without adequate disclosure, thus resulting in widespread overcharging of consumers.
After a very positive ruling from the country’s supreme court, stocks of most of these UK finance companies went up. Spur as it was by bullishness over the news, Close Brothers, a UK specialist lender, had its stock increase by as much as 27% at open. Lloyds Banking Group, which is the largest UK motor loan provider, was up 5.5%. At the same time, FirstRand – which does business as MotoNovo in the UK – increased 4.8%. After the ruling, FirstRand announced that it would set aside more money to compensate employees in case of compensation claims.
There is strong industry support for a new consumer-focused scheme to compensate victims related to off-shore DCAs. Some worries remain. The Finance and Leasing Association (FLA) have opposed the move that would include agreements going back almost 20 years.
“We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information, and the evidence base will be patchy at best. We will be interested to see how the FCA addresses this point in its consultation.” – FLA
As Adrian Dally from the FLA pointed out, neither side of the debate is happy with proposed compensation in the hundreds of millions.
“I’m sure both our side, like the claimant side, will have their red lines.” – Adrian Dally
He indicated that if a compensation scheme remained within certain financial parameters, it would likely be considered reasonable by stakeholders involved.
“If a scheme was in that ballpark, then I think we’ll consider that a reasonable scheme. But if you have numbers that go beyond that, then we would have to think very seriously about that.” – Adrian Dally
So the conversation continues. At the same time, we’ve seen financial institutions such as Close Brothers and Lloyds promise to maintain transparency on their financial provisions linked to the scandal. Close Brothers commented that they appreciated the opportunity to engage with the FCA throughout the consultation process.
“The provision will continue to be reviewed for any further information that becomes available, with an update provided as and when necessary.” – Close Brothers
Lloyds understandably said the same, adding that their provisions too would be under constant review.
“The provision will continue to be reviewed for any further information that becomes available, with an update provided as and when necessary.” – Lloyds