FCA confirms final car finance redress scheme after key revisions

After a six month consultation period, the FCA has now confirmed the details of its consumer redress scheme relating to commission arrangements in car finance transactions.

Following wide spread commentary, the FCA has not simply forged ahead with the original scheme proposed in the October consultation.

Temporal scope

The temporal scope will remain as per the original proposals – consumers will be eligible if they took out a motor finance agreement between 6 April 2007 and 1 November 2024. This proved controversial because it requires lenders to obtain and review records from nearly 20 years ago. Since many consumers will not have retained their own records, and many companies will have deleted consumer data after it no longer became necessary to retain it, this may prove to be a practical limitation on the scope of the scheme.

Some motor finance lenders additionally challenged a start date of 2007 on the grounds that the FCA does not have the power to start the scheme from this date. To allow for the risk of legal challenge, the FCA has opted to implement two schemes - one covering 6 April 2007 - 31 March 2014 and one from 1 April 2014 - 1 November 2024. The latter scheme can then proceed in the face of a legal challenge to the earlier scheme. Given the numbers involved, a judicial review of the redress scheme was always a possibility and the FCA was evidently sufficiently concerned about a challenge to split the scheme in this way. Whilst the intention behind the split is in line with the desire for an expedient scheme, it is likely to add a layer of complexity, and potentially, confusion.

Eligibility criteria

Consumers’ eligibility to join the scheme is broadly as per the original proposal but with some notable reductions in scope.

Consumers will qualify if they purchased a vehicle with a finance agreement that was unfair because there was inadequate disclosure of:

1. A discretionary commission arrangement (DCA) which allowed the broker to increase the interest rate paid by the customer.
2. Commission that was equal to or greater than 39% (increased from the proposed 35%) of the total cost of credit and 10% of the loan, or
3. Contractual ties that gave a lender exclusivity or a right of first refusal, except where the lender can prove there were visible links with the manufacturer and dealer – i.e. it is the inadequate disclosure of the links that will make the relationship unfair, not the links themselves.

Crucially for lenders, cases will be considered ‘fair’ if:

• The commission was low i.e. £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date. 
• The borrower wasn’t charged interest.
• The DCA wasn’t used to earn discretionary commission.
• The lender can prove that it was fair not to disclose one of the arrangements above or that the consumer did not suffer any loss. This includes if a tie wasn’t operated in practice or no better deal was available.

Consequently, fewer consumers will be eligible to join the redress scheme - the FCA estimates a reduction from £14.2m to £12.1m. However, this is not a negative. The change is intended to address the criticisms of the original proposal, which would have compensated those who had not actually been treated unfairly. From a legal perspective, this is an appropriate concession and brings the scheme more in line with the law on civil compensation.

How will the redress be calculated?

There will now be two possible methods of calculating redress:

1. For cases involving an undisclosed contractual tie and/or DCA and very high commission of at least 50% of the total cost of credit and 22.5% of the loan, consumers will receive redress of all commission plus interest.
2. For all other cases, consumers will receive the average of estimated loss and the commission paid, plus interest (referred to in the consultation as the hybrid remedy).

Legal claims

A notable part of the FCA’s announcement is that those pursuing court action to secure a higher level of compensation will be excluded from the redress scheme.  Claimants can therefore choose the FCA scheme, or they can gamble, and pursue a civil action.

What will be interesting is the effect that this announcement has on the claimants seeking to bring an ‘omnibus’ claim against lenders in the civil courts. Currently, multiple claimants can use a single claim form in the context of motor finance commission claims. However, the legal decision that allowed this is subject to an appeal (due to be heard next month). If the appeal is successful, claimants would each have to bring an individual claim against the lender, which makes it a less appealing prospect for a claimant-law firm. This may encourage those claimants considering legal action to settle for the redress available under the scheme.

Comment

The changes made indicate that, in keeping with its priority to support economic growth, the FCA intends to implement a balanced scheme that does not unduly penalise lenders where no unfairness existed. However, even this version of the scheme will incur significant time and costs for the motor finance sector - both in implementing it and in demonstrating compliance.