Motor finance: Litigation likely
The Financial Conduct Authority’s (FCA) announcement of the finalised redress scheme for motor finance claims has seen lawyers decry the impact on consumers and also predict it will be challenged in court.
The FCA said it had tightened eligibility criteria but increased average compensation for older agreements, reducing the likely cost of the scheme to lenders to £7.5bn in compensation, plus £1.6bn in administration costs.
Around 12m policies would be eligible, two million fewer than in the original scheme that was proposed.
Kavon Hussain, a director of Consumer Rights Solicitors, which acted for two of the claimants in the Supreme Court case that led to the scheme’s creation, said: “Millions of consumers have been robbed by the banks – institutions spurred on by nothing but their own greed – and the FCA has let them get away with it.
“The framework the regulator has provided is a mere slap on the wrist for the lenders who will now see this as the cost of doing business. The FCA has largely failed in its duty to protect consumer interests, instead prioritising the bottom lines of major banks.”
Noting that both the redress bill and number of affected policies as set out yesterday had both fallen since last year’s consultation. “The regulator has not delivered justice but rather a discount.”
Coby Benson, solicitor at Bott & Co, said the announcement provided clarity for consumers but many “may still fall short of receiving what they are fully owed”.
“Under the scheme, consumers are expected to receive a standard payout of approximately £829, but many individuals may be entitled to significantly more.
“Certain aspects of the scheme have become even more disadvantageous for vulnerable consumers since the first rules were announced last year, with the FCA revising the eligibility criteria, making it harder for them to access redress.”
Sub-prime borrowers and those subject to higher interest rates “may be unable to receive full redress due to technical thresholds in the FCA’s calculations”, he added.
While the FCA was discouraging consumers from using law firms, Mr Benson argued that “the burden on individuals to navigate complex claims alone, particularly where lenders may challenge eligibility or limit payouts, makes independent legal representation more important than ever”.
Alex Neill, co-founder of consumer rights group Consumer Voice, said: “While compensation payouts for some have increased, it comes at the expense of millions of other drivers who are now excluded altogether. The FCA has narrowed eligibility and reduced the overall bill for lenders, raising real concerns that many people will still be undercompensated.
“Millions of people were overcharged, and our research shows some were pushed into real financial difficulty. This was the regulator’s chance to put that right, but it instead appears to have let lenders off the hook.”
Richard Barnwell, a financial services advisory partner at accountants BDO, said that with around a third of potential claimants already signed up to claims management companies – which say redress should be around £1,500 per agreement – the redress bill could end up at about £12.4bn, over £3bn more than the FCA estimated.
Lawyers for lenders were also not especially happy. Rachel Couter, head of UK contentious financial services at Osborne Clarke, said: “The final scheme is likely to be met with real disappointment by the industry, as it appears to push well beyond what the Supreme Court decided.
“It sharply increases the risk of legal challenge, with many expected to argue that the FCA has overreached. Although the overall compensation bill has dropped from earlier proposals, the redress timetable looks tight for many lenders.”
Katie Stephen, co-head of contentious financial services at Norton Rose Fulbright, said the FCA had stuck to its proposal to require lenders to revisit historic arrangements going back to April 2007 because “substituting a later start date could prompt a raft of complaints to the Financial Ombudsman Service or the courts being dealt with outside the scheme, potentially creating inconsistency and the administrative burden of running parallel complaints processes.
“However, the FCA is clearly alive to the possibility of challenges on this and has therefore decided to implement two separate schemes – one covering the period to 30 March 2014 and one from 1 April 2014.
“This means that any challenge relating to the scheme for the 2007 to 2014 period will not impact implementation of the scheme for the 2014 to 2024 period and will not delay payments to consumers.”
Speaking for the Forum of Insurance Lawyers, Richard Humphreys, a director and head of consumer credit regulatory at DWF, suggested that neither side would be happy. While lenders would be pleased with some of the operational changes, the core approach to redress was broadly unchanged.
“The motor finance industry will still regard the required payments to be well in excess of actual loss suffered by the majority of consumers. On the other hand, claims management companies will continue to argue that payments should be considerably higher.
“Given the impact if redress goes ahead on this basis, the prospect of a challenge to the scheme by either side of the divide must remain high. The result is likely to be further uncertainty and delay for those consumers who are entitled to reasonable compensation.”
For Nathan Willmott, a partner in Ashurst’s disputes resolution practice, the need for a compensation scheme “signals a deep regulatory failure by the FCA over many years, as its rules on disclosure of commissions were so widely misunderstood and misapplied by lenders”.
He went on: “The significant changes made by the FCA show that they have worked very hard to create a redress scheme that is evenly balanced.
“However, the regulator has a near impossible job in designing a scheme that is simple and straightforward to administer, delivers enough compensation to customers to make alternative routes unattractive, and which also avoids an eye-watering cost for the financial services industry.
“The FCA plainly expects the fairness of the plan to be subject to challenge through a referral to the Upper Tribunal, and has therefore split it into two parallel redress schemes in the hope that only the more controversial period – namely the pre-April 2014 period of sales – is challenged.
“I suspect that may be wishful thinking from the FCA, and it is possible that challenges to the schemes are brought by both lenders and borrowers.”
More positive was Sushil Kuner, head of financial services regulation at Freeths, who said the final rules “better reflect the Supreme Court’s fact-specific approach in Johnson, addressing lender concerns that the consultation proposals risked going further than established legal principles on unfair relationships”.
That should help “reduce legal friction and give firms greater confidence in delivering redress at scale”, she added, arguing that the adjustments “should materially reduce the risk of satellite litigation”.
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