FCA Chief Disputes Allegations Concerning Inadequate Compensation in Auto Loan Sector
The Financial Conduct Authority (FCA) has announced plans for a motor finance redress scheme, aiming to address unfair commission arrangements in the industry. This move comes after the UK Supreme Court ruling earlier this year, which found it unlawful for banks to pay a commission to car dealers without the customer's informed consent.
Complaints to the Financial Ombudsman Service (FOS) regarding motor finance have soared to their highest since the PPI scandal for the year ending March 31, 2025. These grievances made a near-500% jump to 73,328 complaints, highlighting the need for action.
Nikhil Rathi, chief executive of the FCA, expressed hope that this would be the final "mass redress" scheme imposed on Britain's banking industry. He urged banks to cooperate with the redress scheme, stating, "Now is not the time to haggle with us but to help put things right for consumers."
The FCA's proposed scheme will cover agreements dating back to 2007, aligning with the Financial Ombudsman Service’s jurisdiction. However, this raises challenges regarding limitation periods and evidential standards. The FCA will consult on the scheme for six weeks, starting in early October 2025, to propose an industry-wide compensation scheme for motor finance customers treated unfairly due to undisclosed or unfair discretionary commission arrangements (DCAs) and possibly other unfair terms.
Key details of the scheme include compensating consumers at a simple interest rate of around 3% per annum (average base rate plus 1%) for the period affected. The FCA will also consult on including non-DCA unfair commission arrangements and potentially setting a de minimis threshold for entitlement. However, the FCA is undecided on whether the scheme will be opt-in or opt-out.
Estimated total costs to the motor finance industry (banks and lenders) are between £9 billion and £18 billion, with a mid-range estimate considered most plausible. Most consumers are expected to receive compensation less than £950 per agreement, significantly less than amounts previously suggested by claims management companies and law firms.
The FCA will weigh factors such as commission size, tied relationships, customer sophistication, and consumer harm when assessing fairness and redress. However, criticisms and challenges are anticipated, particularly in how to evaluate customer sophistication, commission relative to APR, and any dealer benefits like discounts.
Chancellor Rachel Reeves has taken an active stance in the saga, attempting to intervene in the Supreme Court case earlier this year and exploring routes to overturn an adverse ruling. A Treasury spokesperson stated that they will work with regulators and industry to understand the impact for both firms and consumers following the Supreme Court’s judgment.
Criticism from trade associations, including the Finance & Leasing Association, regards the redress scheme as impractical. Stephen Haddrill, director general of the Finance & Leasing Association, has branded the time frame a "major concern."
The Supreme Court's ruling led to an over £7bn stock boost for city banks, with Lloyds Banking Group surging to a five-year high and Close Brothers soaring over 20%. Close Brothers sealed an extra £120m due to its legal win in the Supreme Court case.
In summary, the FCA is preparing a broad but carefully calibrated redress scheme to address unfair motor finance commission arrangements. The scheme balances consumer redress with industry costs and operational challenges but faces scrutiny over its scope and potential effects on the motor finance market.
- The FCA's proposed redress scheme aims to compensate consumers for undisclosed or unfair commission arrangements in motor finance, covering agreements dating back to 2007.
- The financial industry, including banks and lenders in motor finance, may face estimated costs between £9 billion and £18 billion due to the redress scheme.
- The Finance & Leasing Association has voiced concerns about the practicality of the redress scheme, specifically regarding its timeframe.
- The Supreme Court's ruling earlier this year, which found it unlawful for banks to pay commissions without informed customer consent, has led to an over £7 billion stock boost for city banks like Lloyds Banking Group and Close Brothers.
