Context
An FCA review of motor finance agreements found widespread failings on disclosure of commission payments, and of commercial ties, between lenders and brokers. The FCA is now consulting on an industry wide redress scheme which is expected to pay out on roughly 14m unfair motor finance agreements, which could begin next year.
Key points to note and next actions
Motor finance companies broke laws and regulations in force at the time by failing to disclose important information. This led to unfairness, with consumers denied the chance to negotiate or find a better deal and, in some instances, paying more for their loan. A compensation scheme is seen by the FCA as the most efficient way of getting compensation to those owed it and would make it simpler for those who would otherwise struggle to claim.
The FCA estimates that people eligible to claim under the scheme would receive around £700 per agreement, on average. Based on the number of consumers the FCA estimates could take part in the scheme, lenders could pay out £8.2 billion in compensation.
How the scheme would work
The scheme would cover motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable by the lender to the broker. Those who are concerned they weren’t told key details about their motor finance arrangement, e.g. about commission payments – should complain to their lender now if they haven’t done so already.
Once the proposed scheme goes live, lenders will contact those who have already complained. Those who have already complained before the scheme gets up and running are likely to receive compensation faster. Those who haven’t complained will be contacted by their lender within 6 months of the scheme starting. People will be asked if they want to opt-in to the scheme to have their case reviewed. They’ll have 6 months to decide.
Those motor finance borrowers who don’t receive a letter – for example, because lenders no longer have their details and can’t trace them – 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 consumers don’t know who their lender was, there’s information on how to check on the FCA website. The FCA will run an advertising campaign to raise awareness of the scheme.
People will only receive compensation under the scheme proposed if they weren’t told details of at least one of 3 arrangements between the lender and the broker who sold the loan, often a car dealer, which are found in some motor finance agreements:
- A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.
- A high commission arrangement (35% of the total cost of credit and 10% of the loan).
- A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.
There could be rare circumstances in which a lender may be able to show that even if one or more of these features was undisclosed, that there was no unfairness. Where evidence is missing about what was disclosed, lenders must presume they didn’t give borrowers enough information.
The FCA will monitor if firms are meeting the proposed scheme’s rules and will act if they’re not. If people disagree with their firm’s decision, the Financial Ombudsman will assess whether the scheme rules have been followed.