Rathi: Scheme is fair to everyone
The Financial Conduct Authority (FCA) is to discourage consumers from pursuing motor finance claims in court, even if they might recover more damages.
The regulator yesterday published a 360-page consultation paper [1] on its proposed redress scheme, under which it said people would receive around £700 per unfair motor finance agreement.
We will be discussing the consultation and the future of motor finance claims at our Claims Futures conference [2] on 22 October in Manchester.
The FCA estimates that around 44% of agreements signed between 6 April 2007 and 1 November 2024, some 14 million, will be eligible.
On the basis that 85% of consumers will take part in the scheme, this will mean lenders paying out £8.2bn, rising to £9.7bn in the “very unlikely scenario” that all consumers opt in.
The cost to lenders of implementing the scheme will be around £2.8bn, taking the total cost to approximately £11bn.
“A compensation scheme is the best, most efficient way of getting compensation to those owed it and would make it simpler for those who would otherwise struggle to claim,” the FCA said.
Under the proposed scheme, lenders will contact those who have already complained. If they do not hear back after a month, lenders will assume they should review the case.
Those who have not complained will be contacted by their lender within six months of the scheme starting and asked if they want to opt in to have their case reviewed. They will have six months to decide.
Those motor finance borrowers who do not receive a letter – for example, because lenders no longer have their details – will have a year from the scheme starting to make a claim to their lender directly.
People will only receive compensation if they were not told details of at least one of three arrangements between the lender and the broker (usually the car dealer) who sold the loan:
- A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission;
- A high commission arrangement (35% of the total cost of credit and 10% of the loan); or
- A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.
If people disagree with their lender’s decision, they can complain to the Financial Ombudsman, which will assess whether the scheme rules have been followed.
The FCA has been vocal in saying that consumer do not need to use a law firm or claims management company (CMC) to make a claim and its research found that 41% of those who have had motor finance agreements and know about possible compensation did not appreciate this.
The consultation acknowledged that consumers could choose not to opt in to the scheme and instead take their case to court, “where they may get more or less compensation than under our scheme, based on the facts of their case”.
It continued: “However, the outcome of a court claim is uncertain and accounting for legal fees they may pay, many consumers could end up with less. Our scheme is also likely to be faster and simpler than going to court. If consumers opt out of the scheme, they cannot opt back in.
“When choosing whether to use a CMC or law firm, it’s important consumers can make an informed decision. We have joined with the Solicitors Regulation Authority [3], to tackle misleading advertising and potentially excessive fees charged by some CMCs and law firms.”
Asked by Legal Futures at a press briefing yesterday whether it would be telling consumers that they could obtain greater compensation by going to court, FCA chief executive Nikhil Rathi said: “In designing the scheme, we’ve paid very close attention to the remedies the senior courts have determined and then our legal obligations as well in how we assess loss and harm, so that’s why we think this is fair to everybody, firms and consumers.”
The FCA said some consumers or professional representatives may view court action as a more favourable route due to “a perception that courts routinely award pre-judgment interest at 8%” – for scheme payments it is proposing a simple interest rate based on the annual average Bank of England base rate per year plus 1%. The likely average will be 2.1%.
The consultation went on: “However, court awards for pre-judgment interest are discretionary, and consumers must weigh the financial and other costs of litigation against the greater efficiency, reduced costs and accessibility of our proposed scheme.
“We note that, in Johnson, the Supreme Court directed that interest should be added at an ‘appropriate commercial rate’. Although the court did not specify the rate, we consider it unlikely that a commercial rate would be as high as 8%.”
Mr Nikhil added: “We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated. On such a complex issue, not everyone will get everything they would like.
“But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”
Alongside the consultation, the FCA yesterday wrote to all CMCs [4] to highlight the conduct issues it would be looking at if they handle motor finance claims, including adequate pre-contract disclosure, excessive termination fees, not placing an “undue burden” on lenders with their requests, and that their fees offer “fair value”.