The Financial Conduct Authority (FCA) has confirmed the next steps towards a potential motor finance redress scheme if it decides motor finance customers have lost out from widespread failings by firms.
The Financial Conduct Authority has said it will consult on a motor finance redress scheme if it decides motor finance customers have lost out from widespread failings by firms.
The financial watchdog said it wanted to provide as much certainty as possible to firms, consumers and industry stakeholders to signpost the next steps as part of its review.
The wider industry is still waiting for the FCA to publish the results from its review into the past use of motor finance discretionary commission arrangements (DCAs).
The results of the review were expected to be published in May, but it has now confirmed it will publish its results and next steps within six weeks of the Supreme Court’s decision.
Since the FCA launched its review, a ruling by the Court of Appeal has raised the possibility of widespread liability among motor finance firms wherever commissions were not properly disclosed to customers.
The Supreme Court will hear an appeal against the Court of Appeal’s judgment on April 1-3.
It could mean next steps will be set out into the middle of May, or potentially further into the month or June depending on the exact date of the Supreme Court’s ruling.
A statement from the FCA said: “We’re seeking to understand if firms failed to comply with requirements relating to DCAs and if consumers lost out as a result.
“If they have, we want to make sure consumers are appropriately compensated in an orderly, consistent and efficient way.”
The FCA has been granted permission to intervene in the case and has filed its submission with the Court.
The FCA said: “We are confirming that if, taking into account the Supreme Court’s decision, we conclude motor finance customers have lost out from widespread failings by firms, then it’s likely we will consult on an industry-wide redress scheme.
“We previously said it is more likely than when we started our review that we will introduce an alternative way of dealing with complaints.”
‘Consult’ is mostly technical, this really means the FCA has made up its mind…Martin Lewis
Martin Lewis and the Moneysavingexpert team have already offered advice to motorists, describing the FCA’s announcement as all but confirming the redress scheme.
Lewis made his prediction for what he expects to be the most likely outcome: “Many expect the Supreme Court to overturn the Court of Appeal ruling on Commission Disclosure complaints.
“If that happens then the redress scheme will only be set up for DCA complaints.
“This is still huge, and the fact the payouts will be automatic means it would reach more people and likely be in the billions to low tens of billions of pounds.”
What would happen with a motor finance redress scheme?
Under a redress scheme, firms would be responsible for determining whether customers have lost out due to the firm’s failings.
If they have, firms would need to offer “appropriate compensation”.
The FCA said it will set rules firms must follow “and put checks in place to make sure they do”.
The FCA believes a redress scheme to offer compensation would be simpler for consumers than having to file a complaint.
It said it would expect fewer consumers to rely on claims management companies for compensation as a result of a redress scheme, meaning they would keep all of the compensation they would receive.
The FCA further stated: “A redress scheme would also be more orderly and efficient for firms than a complaint led approach, contributing to a well-functioning market in the future.”
Black Horse owner Lloyds Banking Group has already set aside £1.25 billion to repare for costs and a potential redress scheme if it does happen, while Close Brothers has also set aside £165m for a potential redress scheme.
The motor finance saga has drawn comparisons to the infamous payment protection insurance (PPI) mis-selling scandal, with some analysts warning that the final cost to lenders could reach £44bn.
FCA sets out the next steps
As previously mentioned, the next steps will be set out within six weeks of the Supreme Court’s decision.
This will confirm whether a redress scheme will be put in place and the mechanics of how it will work.
The Court of Appeal case involved complaints about discretionary and non-discretionary commission arrangements (non-DCAs).
The FCA said: “Our next steps on non-DCA complaints will also be informed by the outcome of the Supreme Court case.
“Depending on the Supreme Court’s decision, we may also consult separately on changes to our rules.
“Throughout our work, we will continue to consider how to make sure affected consumers are appropriately compensated and the motor finance market continues to work well, with effective competition, for the millions of consumers who rely on it every year.”
The story so far…
The Finance and Leasing Association recently acknowledged it is bracing for all possible outcomes – both good and bad – in the imminent Supreme Court’s ruling on commission disclosure which will ultimately determine a lender’s fiduciary duty and whether it will be enshrined as a permanent legal standard.
An October 25 landmark judgment by the Court of Appeal raised significant questions about the legality of undisclosed “secret” commissions agreed between car dealers and finance companies when car loan providers Close Brothers and FirstRand – the owner of MotoNovo – challenged earlier court rulings that had found in favour of the consumer.
Those lenders are now appealing in the Supreme Court.