Rathi: Scheme should be fair and easy to participate in
The Financial Conduct Authority (FCA) yesterday confirmed that it would issue a consultation in early October on an industry-wide motor finance compensation scheme, stressing again that consumers need not use a law firm or claims management company (CMC).
Its guidance to consumers advises that those already signed up to one can end their agreement, “but you may be charged a fee. This fee should be reasonable and should reflect the work the firm or CMC has already done”.
However, it has not yet decided whether the scheme will cover the type of claim that succeeded in Friday’s Supreme Court ruling [1] – an unfair relationship under the Consumer Credit Act 1974 – or whether it will be opt-in or opt-out.
The scheme is set to cover agreements dating back to 2007, which would mean “consumers would not need to use other routes to secure compensation and prevent large numbers of ongoing disputes in the courts”, the FCA said.
FCA chief executive Nikhil Rathi said: “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.
“Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a CMC or law firm. If you do, it will cost you a significant chunk of any money you get.
“It will take time to establish a scheme but we hope to start getting people any money they are owed next year.”
Martin Lewis, the founder of MoneySavingExpert.com, said the consultation would also consider whether people who had already signed up to a law firm or CMC would have to pay them – essentially for doing nothing – if they received an automatic payout.
While the Supreme Court ruling meant that some customers would not receive compensation, it did not close the door to all and the FCA currently estimates that most of those with valid claims will probably receive less than £950 in compensation, with the total cost of the scheme likely to be somewhere between £9bn and £18bn.
It said the Supreme Court had provided “clarity” on what was an “unfair” relationship that fell foul of the Consumer Credit Act, the claim brought by Marcus Johnson that succeeded.
The court said such factors could include the size of the commission relative to the charge for credit, the nature of the commission (for example, whether it was discretionary), the characteristics of the consumer, compliance with regulatory rules, and the extent and manner of disclosure – and if the commission was kept secret. The latter was not determinative, it said.
The consultation will propose rules on how lenders should “consistently, efficiently and fairly decide whether someone is owed compensation and how much”, the FCA said. It would then monitor to check that firms were complying with this and act if they were not.
The scheme will cover discretionary commission arrangements (DCAs) – where the broker could adjust the interest rate offered to a customer in return for a higher commission – if they were not properly disclosed.
The consultation will also ask which non-DCAs should be included in light of the ruling in Mr Johnson’s case.
The FCA said its methodology for calculating redress would be informed both by the degree of harm suffered by the consumer and “the need to ensure consumers continue to be able to access affordable loans for motor vehicles”.
Whatever method is used, it was “unlikely any alternative would lead to higher remedies overall than full repayment of commission. Some could lead to lower payments”. The consultation will ask whether there should be a de minimis threshold to be eligible.
It will also consider how to approach interest. This will probably be based on the average base rate that year plus 1%, meaning a simple interest rate of around 3% per annum.
The FCA guidance to consumers was that those who have already complained need do nothing, while those concerned they were not told about commission and may have paid too much should complain now to the lender.
It continued: “We aim to make any scheme easy to participate in, without needing to use a CMC or law firm. Using a CMC or law firm may end up costing them up to 30% in fees of any compensation they receive.”
The regulator said it has required 225 promotions from CMCs on motor finance to be amended or withdrawn in the past year, “including some which were highly speculative in suggesting the compensation consumers may get”.
It continued: “We will continue to act against firms using clickbait-style promotions or language that suggests a guaranteed outcome before any investigation into a consumer’s claim has taken place. Firms must ensure that all financial promotions are clear, fair, and not misleading, and that they accurately reflect the nature and status of any potential claims.
“We will ensure firms handle claims consistently, efficiently and fairly.”
Alex Neill, co-founder of consumer rights group Consumer Voice, welcomed the FCA’s announcement and said “the big test is whether the scheme will deliver a fair level of compensation at scale”.
She added: “There will be big hurdles for the regulator to overcome including being able to contact all affected drivers and convincing consumers to trust a scheme run by the wrong-doers.”
A statement from Slater & Gordon issued before the FCA announcement said: “This landmark ruling is positive news for the millions of people who have lost money due to the car finance mis-selling.
“The court confirmed that for years, consumers have potentially been unfairly overcharged on car finance agreements, and this ruling reinforces their right to pursue justice and recover the compensation they deserve.
“This ruling does however show there is complexity to this issue and why people should continue to have the option to hire a lawyer to help them professionally navigate the process and get what’s due to them.”
“The onus is now on the FCA to produce a redress scheme that matches the interests of the judgment and consumers.
“We remain concerned that aspects of any proposed redress scheme may inadvertently exclude a significant number of affected consumers. It’s crucial to ensure that the scheme fully considers and protects the interests of individuals experiencing vulnerability.”
A lender-led scheme would not have public confidence, it argued, while many people could miss out because of lenders’ record retention and difficulties with tracing people.
Last week, the FCA issued a joint warning [2] with the Solicitors Regulation Authority that law firms and CMCs would be expected to inform clients of a redress scheme and their ability to pursue a claim for themselves free of charge.
The FCA consultation should be out in time to discuss in the ‘Motor finance claims – where next?’ session at our Claims Futures conference [3] on 22 October in Manchester. Early bird tickets are still available.