The Finance and Leasing Association (FLA), the trade body representing the car finance industry, has deemed the financial regulator’s proposed compensation scheme for alleged car finance mis-selling as “completely impractical.”
Speaking to the BBC, the FLA’s chief executive voiced concerns over the potential scope of the redress scheme, which could extend to loans dating back to 2007, raising issues regarding the availability of records for both firms and customers.
This statement follows a Supreme Court ruling that narrowed the parameters for potential payouts related to undisclosed commissions on car loans, although the judgement did leave open the possibility of redress for millions of drivers.
The Financial Conduct Authority (FCA) is scheduled to commence consultations on the compensation issue in October, projecting that individual payouts are likely to be less than £950 per agreement.
Share prices for major car finance lenders experienced a surge on Monday following the Supreme Court’s decision, which served to limit the scope of potential compensation.
Notably, Lloyds shares increased by 9%, while Close Brothers saw a 20% rise. Both institutions had previously allocated funds for potential compensation, with Lloyds setting aside £1.15 billion and Close Brothers earmarking £165 million.
On Monday, the FCA announced its intention to require firms “as far as possible” to proactively inform customers about their eligibility and the process for claiming compensation if mis-selling is established.
The regulator also indicated that eligible claims “should cover agreements dating back to 2007”.
Money Saving Expert’s Martin Lewis estimates that up to 14 million individuals could be eligible for compensation.
However, Stephen Hadrill of the FLA, speaking on the BBC’s Today programme, argued that extending the redress scheme back to 2007 is “completely impractical.”
“It’s not just firms that don’t have the details about contracts back then, the customers don’t either,” he stated.
“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.”
FCA head Nikhil Rathi declined to dismiss the possibility that claimants could be disadvantaged due to missing documentation.
Speaking on BBC Breakfast, Mr. Rathi suggested that contentious cases might be resolved through the courts, provided at least one party possesses some relevant details.
“We’re going to have to work through those issues in the consultation where one or the other party doesn’t have all the details. That is one of the challenges here.”
The Supreme Court’s ruling permits compensation claims for instances of particularly high commissions deemed unfair.
However, Mr. Hadrill highlighted the ambiguity surrounding the definition of an “unfair” agreement, given the Supreme Court’s emphasis on considering multiple factors.
“I don’t think this scheme comes up with a solution to how you look at a whole range of factors [for loans]… and the FCA really needs to do that.”
He criticized the FCA’s compensation plan as appearing to be a “one-size-fits-all scheme,” which he argues is inconsistent with the court’s decision.
Responding to this, the FCA’s Mr. Rathi stated that the regulator must “make a judgement about that based on what the Supreme Court has given us and they have said different characteristics determine what’s unfair”.
These characteristics may include the commission level, its disclosure, and the consumer’s individual circumstances.
The FCA estimates the total cost of such a scheme to range from £9 billion to £18 billion. A separate analysis by RBC Capital Markets estimates the total cost could be £11.5 billion.
The financial industry is anticipated to bear the full costs of any compensation scheme, including administrative expenses.
Mr. Hadrill of the FLA cautioned that the “cost will have to be absorbed somewhere.”
“Ultimately, the more expensive lending becomes, the more expensive borrowing becomes for the consumer.”
The FCA maintains that it expects “a healthy finance market for new and used cars to continue notwithstanding any redress scheme we propose.”
The FCA advises customers who believe they may have been treated unfairly to contact their lender to file a complaint.
However, it stressed that engaging a claims management company (CMC) or law firm is not necessary to participate in any compensation scheme it establishes.
The regulator cautioned that individuals who enlist the services of a CMC could incur fees of up to 30% of any compensation received.
The Supreme Court’s decision on Friday, siding with finance companies in two out of three key test cases, has reduced the projected overall cost of mis-selling compensation compared to earlier estimates.
Lenders, including major UK banks and specialist motor finance firms, had already allocated over £2 billion for potential payouts in anticipation of the court ruling.
In a statement, Lloyds, which has set aside nearly £1.2 billion for potential costs, stated that “if there is any change to the provision it is unlikely to be material in the context of the Group”.
Russ Mould of AJ Bell commented that the “worst-case scenario, like a particularly ugly pothole, has been swerved.”
“This wasn’t a complete win for the industry, with lenders still potentially on the hook if the relationship with customers meets the threshold of being unfair.”
However, he added: “Essentially, while this issue could still cause some damage, it looks unlikely to be a repeat of the PPI scandal which blighted the banking industry in the 2010s.”