City regulator the Financial Conduct Authority has published details of an industry wide compensation scheme
Car buyers could be in line for a more than £8billion payout under a compensation scheme proposed by the City watchdog.
The Financial Conduct Authority says money could start to be paid on an expected 14 million unfair motor finance agreements next year. It estimates people would receive around £700 on average per agreement.
It came as the FCA released details of an industry-wide compensation scheme which it has proposed. 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.
The expected payout is less than the £9billion to £18billion it had originally estimated but would still be one of the financial sector’s biggest compensation schemes. Experts think firms will have to shoulder a further £2.8 billion of costs, taking total industry costs to around £11 billion.
Crucially, the scheme being proposed would be free for consumers. It follows concerns over the role of claims management companies given some can take a big chunk of any payout. It stressed that people can submit their own complaint using a template letter (DOCX) on the FCA’s website. And it added: “Those who choose to use a claims manager or law firm could lose a significant amount of any compensation owed. “
The FCA believes the scheme would also work for lenders as, without it, many cases would go through the courts or the Financial Ombudsman Service resulting in bigger legal and admin costs.
The scheme would cover motor finance agreements taken out between April 6 2007 and November 1 2024, where commission was paid by the lender to the broker, which was often the car dealer. It could be that people took out more than one loan over the whole of that time, meaning they could get multiple payouts.
Nikhil Rathi, chief executive of the FCA, said: “Many motor finance lenders did not comply with the law or the rules. Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.
“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.”
The FCA says that, once the proposed scheme goes live, lenders will be expected contact those who have already complained they were missold car finance. It says that if they do not hear back after one month, lenders will be expected to review the case.
Those who have not complained should be contacted by their lender within six months of the scheme starting. They will be asked if they want to opt-in to the scheme to have their case reviewed.
It could be that those eligible for compensation do not receive a letter, for example, because lenders no longer have their details and can’t trace them. In that case, they will have a year from the scheme starting to make a claim. They will be able to do so by making a claim to their lender directly. If they don’t know who their lender was, the FCA says there will be information on how to check on its website. The watchdog is also planning an advertising campaign to raise awareness of the scheme.
Compensation will only be due if buyers were not told about at least one of three arrangements that were in place between the lender and the broker or dealer.
They are a “discretionary commission arrangement”, which allowed the broker to alter the interest rate the customer would pay in order to pocket higher commission, a chunky commission that amounted to 35% of the total cost of the credit and 10% of the loan, or contractual ties that gave a lender exclusivity or a right of first refusal.
The FCA’s estimates of the payout relate to about 89% of the market, covering more than 30 lenders.
Buyers who took around four million loan agreements between them have already made complaints, meaning another 10 million have yet to engaged in the process so far.
Law firm Bott and Co “We will be carefully and eagerly reviewing the FCA’s proposed redress scheme to ensure it delivers fair and meaningful outcomes for consumers affected by unfair motor finance practices.
The scheme must provide compensation that truly reflects the harm suffered by consumers, and anything less would be a failure to properly address the scale of this issue. The rules published this evening are not final. This is a consultation process, and Bott and Co will be submitting a formal response on behalf of our clients to make sure their interests are strongly represented.
“Our priority is ensuring that any final scheme puts consumers first. We remain committed to holding the industry to account and securing the best possible outcomes for those impacted.”
Zoe Morton, financial services director at consulting firm RSM UK, predicted the FCA’s move could have wider implications. “This may be the tip of the iceberg when it comes to compensation for consumers for discretionary commissions,” she said.
“Such commission arrangements expand beyond motor finance into other areas of financial services, including insurance and financial advice. We expect to see the regulator examining other areas where commission structures may result in foreseeable harm to customers, especially if they haven’t been clearly communicated.”