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The Financial Conduct Authority is set to unveil a consultation on a scheme to compensate an estimated 14 million drivers who paid over-the-odds for car finance. – how it might work
Millions of drivers will finally receive details of the long-awaited car finance compensation scheme tomorrow.
Regulator the Financial Conduct Authority has previously put the potential payout at anything from £9billion to £18billion. It confirmed that a consultation will be issued, along with a statement, on a proposed motor finance redress scheme shortly after stock markets have closed at 4.30pm.
Consumer champion Martin Lewis, of Moneysavingexpert.com, has estimated up to 14 million people could be eligible. The move follows evidence that some motor dealers did not tell buyers that they were earning commission from lenders on some car finance deals they sold.
The FCA stepped in after a Supreme Court ruling provided clarity on a separate issue, that could have entitled even more people to compensation.
If the scheme goes ahead following the consultation then the first payments could be made next year. The FCA has estimated that most individuals will probably receive less than £950 in compensation.
Nikhil Rathi, chief executive of the FCA, said in August: “It is clear that some firms have broken the law and our rules. Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get.”
Adrian Dally, director of motor financing at trade body the Financing and Leasing Association, has questioned whether the FCA’s estimated payout is too high.
He claimed officials would struggle to prove the true scale of the losses by ca buyers was in the £9billion to £18billion range. “We still don’t know what was behind the (FCA’s) suggestion,” Mr Dally told the Financial Times. “They haven’t shown the working. We think it should be less than the £9billion. The FCA is due to publish its calculation along with its statement.
What should I do now?
Sit tight for now, as it will take some time yet for any redress scheme to be finalised and then launch. Although the details still needs to be ironed out, the FCA has previously said it would aim to make any scheme “easy to participate in, without needing to use a claims management company (CMC) or law firm.” It made the point that using a CMC or law firm could end up taking up to 30% of any compensation in fees.
Do though put in a complaint to your bank or finance firm if you think you have been wronged. A consultation on how the scheme will work will begin soon and, if goes ahead, the first payments will be made next year.
Will I be eligible for compensation?
That’s tricky to answer at the stage as, firstly, the consultation has not yet launched and, secondly, it may depend on a case-by-case basis.
But consumer champion Martin Lewis reckons up to 14 million people could be eligible. Just because the dealer you bought your car from received commission may not be enough to get you money.
However, if there were “discretionary commission arrangements” involved then there is a good chance you might. These DCAs meant the interest rate you paid on the loan – Personal Contract Purchase or higher purchase – wasn’t fixed and could vary.
One reason was that dealers could get a bigger commission if the buyer was charged a higher rate of interest, even though that meant the punter paid more over the life of the loan. It is however, most likely to apply for cars – both new and second hand – bought on finance between 2007 and 2021.
But the Supreme Court threw up an important point, which meant even when these “discretionary” rewards weren’t involved, the set-up could still be deemed unfair. In this case it involved the size of the commission relative to the loan – a whopping 55%. Therefore, other arrangements deemed unfair could be potentially be included in the scheme, but we just don’t know yet.
How much will I get back?
If you were hoping for thousands, you’re likely to be disappointed. The FCA currently estimates that most people will probably receive less than £950 in compensation.
Interest is normally paid on compensation. The FCA says it plans to consult on an interest rate for each year of the scheme based on the average base rate that year plus 1%. This would be in the ballpark of a simple interest rate of 3% per annum.
How will the scheme work?
This is another thing the consultation needs to nail down. One option is for an opt-out scheme, so people wouldn’t need to do anything and would wait to be contacted by the bank or finance firm involved.
The alternative is an opt-in type of scheme. The FCA says: “There are pros and cons to either approach and a range of views, which will be explored thoroughly through the consultation.”
Another thing to consider is how the compensation will be calculated. One possibility is that the payout won’t be higher than the commission the dealer got.
How much will the scheme cost?
The FCA thinks the final cost of any compensation scheme will depend on the final design. It reckons it unlikely the bill for the whole scheme, including to run it, would be much lower than £9billion.
In some scenarios the cost could be as much as £18billion, though it does not believe it will get that high. “A total cost midway in the range, as forecast by some analysts, is more plausible”, which would make it around £13.5billion.
The regulator has been weighing-up the need to punish banks without curtailing their appetite and ability to lend, or pushing up the cost of future car finance, which could hurt manufacturers and the economy.
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