Rathi: Warning to law firms and CMCs
The Financial Conduct Authority (FCA) has promised “robust action” against law firms and claims management companies (CMCs) that engage in “sharp practices” around the finalised motor finance compensation scheme.
Chief executive Nikhil Rathi told a press conference today that “all law firms are going to have to consider very carefully what’s in their clients’ best interests” when it came to advising against using the scheme.
He warned that the FCA, for CMCs, and the Solicitors Regulation Authority (SRA), for law firms, would act quickly in response to behaviour not in clients’ best interests.
Earlier in the day, the two regulators announced a new taskforce with the Information Commissioner’s Office and Advertising Standards Authority to “join up their efforts” in tackling poor handling of motor finance claims by what the FCA collectively terms professional representatives.
Mr Rathi said there was “no compelling evidence” that any consumer who took their case to court would receive a better outcome than if they used the scheme.
Stephen Braviner Roman, the FCA’s general counsel, told the briefing that he hoped consumers would recognise that, in contrast with the “free, simple to use” scheme, taking legal action would be a “complicated, longer process” with “no guarantee of any outcome” except that they would lose 30% of any compensation they received.
He added that, if a consumer went to court, the lender could pause consideration of their complaint. If the case reached a substantive hearing, they would then be excluded from the scheme.
But the FCA response to its consultation on the scheme said: “We recognise that some consumers may still prefer to use a [professional representative] after being provided with adequate information to make an informed choice.”
Research released today by consumer rights organisation Consumer Voice found that 68% of vulnerable car owners could not remember their lender, more than half did not have their paperwork, and only a third said they would find it easy to work out whether they qualified for a scheme.
Trust was also “extremely low”, with just 7% saying they completely trusted lenders to follow the rules when calculating compensation.
The FCA consultation received more than 1,000 responses. As a result, it has tightened eligibility criteria “so only those treated unfairly are compensated”, increased average compensation for older agreements and introduced a minimum 3% compensatory interest rate per annum.
As a result, 12.1m agreements made between 2007 and 2024 are now eligible for compensation, fewer than under the FCA’s original proposals, with the average payout around £830 each, more than had been suggested.
Some 90,000 agreements will see the commission repaid because they involved very high commission (of at least 50% of the total cost of credit and 22.5% of the loan), and a contractual tie to the lender and/or a discretionary commission agreement (DCA).
The rest will receive the average of the estimated loss and commission paid; this is set at 17% for cases from April 2014 and 21% before. There were more DCAs pre-2014, although the interest difference only amounts to an extra £31 for such cases.
Payouts will be capped in around one in three cases – where borrowers paid a lower-than-average interest rate – to ensure no one ends up in a better position than had they been treated fairly.
The FCA estimates that 75% of eligible consumers will make a claim (85% in its original proposals), meaning total redress paid will be £7.5bn, plus lenders will shoulder £1.6bn in administrative costs. The £9.1bn total cost compared to the £11bn estimated by the consultation.
Those who complain to their lender by the implementation period should receive their payout this year, it said.
For loans take out from 1 April 2014, the implementation period ends on 30 June, and on 31 August for older loans. Consumers have until 31 August 2027 to make a claim if they have not been contacted.
Lenders will have three months from the end of the implementation period to inform those who have already complained whether they are owed compensation and how much, and six months for those who have not.
The FCA has set up a dedicated supervisory team to supervise lenders’ compliance – with a senior manager at each required to “attest” that they have set up a scheme in line with the rules – and consumers will be able to ask the Financial Ombudsman Service to review if the lender followed them.
Without such a scheme, the FCA said, the cost to lenders of dealing with complaints through the ombudsman or courts would be over £6bn higher.
The consultation response acknowledged that “the conduct and cooperation” of professional representatives was “important for the efficient operation of the scheme”.
“It is the responsibility of PRs to ensure they comply with consumer protection law, including that consumer contracts comply with the fairness and transparency requirements of the Consumer Rights Act,” it said.
“We are jointly monitoring misconduct, including through engagement with the Claims Management Ombudsman and Legal Ombudsman.”
The regulator taskforce will step up intelligence sharing. Deb Jones, executive director of transformation and the SRA’s taskforce lead, said: “We want consumers to have confidence in the system.
“The taskforce is a great example of how we as regulators can use our collective expertise and powers to not only take action, but also to improve consumers’ awareness of the standards they can expect from law firms and CMCs.”