The UK’s financial regulator has proposed a redress scheme to compensate motorists mis-sold car finance deals dating back to 2007. However, the Finance and Leasing Association (FLA), representing the car finance industry, has criticised the initiative as “completely impractical” amid concerns over record keeping, costs, and potential impacts on future lending.
FCA Proposes Redress Scheme Following Supreme Court Ruling
The Financial Conduct Authority (FCA) announced on Sunday it will launch a consultation in October to determine eligibility criteria and compensation levels for a redress scheme aimed at addressing widespread mis-selling in the car finance market. The scheme comes in the wake of a landmark Supreme Court ruling last Friday, which found that most hidden commissions paid by lenders to car dealers on finance deals were not unlawful. This verdict means that many consumers will be unable to claim compensation.
Despite the Supreme Court clearing the way for continued commission payments, judges left the door open for claims related to exceptionally large commissions deemed unfair, suggesting that some motorists could still be entitled to recompense. The FCA estimates the total cost of the compensation programme to the industry could range from £9 billion to £18 billion, although individual claimants are likely to receive less than £950 per mis-sold agreement.
Stephen Hadrill, CEO of the FLA, told BBC’s Today programme that the scope of the proposed scheme, reaching back over 15 years to 2007, raises serious practical challenges. “It’s not just firms that don’t have the details about contracts back then, the customers don’t either,” he said. “And, if we’re going to have to take careful decisions about who gets compensation, who gets redress, and who doesn’t – you need that information. I just think going back that far is not the right thing to do.”
Industry Concerns: Record-Keeping and Financial Impact
Car finance firms face significant administrative burdens to trace vintage contracts and establish eligibility, a process complicated by data loss over time and customer turnover. Hadrill emphasised that requiring firms to track down outdated paperwork to administer redress could be “completely impractical” and result in systemic inefficiencies.
The FLA also warns that the substantial financial costs associated with the scheme may translate into reduced availability of car financing options and increased borrowing costs for consumers. “Ultimately, the more expensive lending becomes, the more expensive borrowing becomes for the consumer,” Hadrill noted. This echoes wider concerns that regulatory penalties may constrict credit supply and hinder market competition.
However, the FCA has sought to reassure stakeholders, stating it expects “a healthy finance market for new and used cars to continue notwithstanding any redress scheme we propose.” The regulator also highlighted its intention to “require firms as far as possible to make customers aware they may be eligible and what they may need to do.”
Background: Hidden Commissions and the Legal Battles
The controversy stems from the practice of lenders paying car dealers undisclosed commissions for arranging finance deals. Critics argue such payments incentivised excessive sales of expensive finance packages, harming consumers through mis-selling and lack of transparency. The trade-off often led to buyers unknowingly accepting higher-cost credit.
The Supreme Court’s ruling resolves a lengthy legal debate triggered by a series of test cases. Judges sided with finance firms in two out of three key applications, ruling that most commission payments were lawful under existing contracts. However, they acknowledged potential grounds for compensation where commissions were unusually high and deemed unfair.
Since the issue first emerged, thousands of motorists have lodged complaints with their finance providers alleging mis-selling linked to hidden commission arrangements. The FCA has advised customers who have not yet submitted complaints to approach their providers directly rather than engage third-party claims management companies, which often charge fees or take hefty commissions.
Wider Implications and Future Outlook
The FCA’s forthcoming consultation aims to strike a balance between compensating consumers for past wrongs and maintaining market stability. Consumer advocacy groups have welcomed moves to compensate victims but warn that long timeframes for claims could discourage many from pursuing redress.
Financial industry experts have underscored the unprecedented scale of the proposed redress scheme. “This is among the largest consumer compensation programmes ever considered in the UK financial services sector,” said Dr. Emma Smith, a banking analyst at the Centre for Financial Regulation. “The FCA’s challenge will be to design a scheme that is fair, efficient, and sustainable, avoiding unintended consequences for credit availability.”
The consultation process, expected to run for several months, will invite input from consumers, lenders, dealers, and legal experts before the FCA finalises eligibility rules and compensation methodologies. Stakeholders will be watching closely to see whether the regulator adjusts the problematic 2007 start date for eligible agreements or refines the criteria for claims.
Summary
- What: FCA proposes redress scheme for car finance mis-selling dating back to 2007.
- Who: Scheme covers consumers with potentially unfair hidden commissions; industry represented by FLA opposes broad scope.
- Why: Stemming from Supreme Court ruling partially validating commission payments but allowing claims for excessive commissions.
- When: Consultation to begin October 2023; redress scheme timeline yet to be finalised.
- Where: United Kingdom.
- Comment: Firms may need to notify customers, verify contracts, and process compensation claims; cost estimated at up to £18 billion.
As the FCA prepares to open consultations, the fate of the UK car finance sector remains uncertain, with consumers hopeful for justice and the industry wary of financial fallout. The upcoming months will be critical in shaping how redress is administered and how future car finance markets evolve.
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