The Financial Conduct Authority (FCA) has announced plans to establish a compensation scheme for consumers impacted by the UK car finance scandal, which has been labeled “the biggest consumer finance scandal since PPI” by Bobby Dean, a Liberal Democrat MP. This new scheme is intended to address the economic harm experienced by drivers. It zeroes in on the discretionary dealer commission structures/procedures that permitted auto financing markups/gouging from 2007 until 2020.
A startling 14.6 million auto loans with these predatory arrangements were issued in this span. The FCA thinks millions of motorists who took out loans to buy their vehicles could be entitled to compensation. Their best guess is that total payouts will be between £10 billion to as much as £18 billion. According to the regulator, estimates around the mid-point of this range are more credible.
Nikhil Rathi, the FCA’s chief executive, stated that the organization recognizes the legal breaches committed by some firms in the industry. He emphasized the importance of compensating affected customers while ensuring that the market continues to function effectively for millions of users each year.
“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.” – Nikhil Rathi
Discretionary commissions were outlawed in 2021. These commissions had permitted car dealers to make more money by putting customers on loans with higher interest rates for lenders. Unsurprisingly, the Supreme Court’s recent ruling overwhelmingly sided with finance companies, reversing a lower court ruling that had found these commissions to be illegal.
The FCA intends to launch a formal consultation on the design of the compensation scheme no later than October. Rathi underscored that bringing the program to fruition will be a long, labor-intensive process. He alluded to optimism that people most impacted could begin getting paid as early as next year.
“It will take time to establish a scheme but we hope to start getting people any money they are owed next year.” – Nikhil Rathi
Rathi highlighted the intention behind the scheme, stating, “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.”
Even with the best of intentions behind the compensation initiative, there are still plenty of hurdles to overcome. Industry leaders point to some challenges that lie ahead in building this consumer trust. It’s easy to be dubious about a plan administered by the very people who perpetrated the crime.
In an interview, industry analyst Alex Neill highlighted the need for transparency in the claims process. He challenged the scheme’s ability to reliably provide equitable and adequate compensation at scale.
“This is a vital opportunity to restore trust and put right wrongdoing by dealers and lenders. But as ever, the devil will be in the details – the big test is whether the scheme will deliver a fair level of compensation at scale.” – Alex Neill
Bobby Dean underscored the importance of the moment. As an example, he underscored the fact that millions of Americans are probably due restitution themselves. The overall bill for payouts could be more than £10 billion. He called on the industry to make this scandal a turning point, putting honesty at the center of its operations going forward.
“Millions will be owed. The compensation bill is likely to surge above £10bn. Industry must learn that honesty matters and adjust their practices going forward accordingly,” – Bobby Dean
As the FCA gears up to deploy this new compensation scheme, stakeholders will be watching its creation and execution very closely. Depending on how it plays out, this result may reestablish consumer faith in auto lending. It goes a long way toward restoring accountability in an industry that millions of consumers turn to each year.