FCA Car Finance Redress: Comment and Analysis

The FCA has published its consultation on the motor finance compensation scheme. It estimates that, on average, customers due compensation will be eligible for £700.

The Regulator estimates that this will result in £8.2 billion paid in compensation with a further cost of £2.8 billion to firms for implementing scheme taking total industry costs to around £11 billion.

Darren Richards, Head of Insurance, Regulatory & Risk at leading independent financial services consultancy Broadstone, commented: “The FCA’s consultation on its method for calculating redress suggests the cost to the industry will broadly fall in the middle of its estimated range at the time of the Supreme Court ruling.

“The FCA provided clarity on what it determined to be an ‘unfair’ agreement irrespective of whether there was a discretionary or non-discretionary arrangement. This was determined to be inadequately communicated high commission arrangements, at least 35% of the total cost of credit and 10% of the loan, or tied arrangements that gave a certain lender exclusivity or a first right of refusal.

“Its redress methodology aims to combine the overpaid commission plus interest and the Regulator’s own estimation of loss – taking into account that the loan with commission may have been at a different interest rate than the market norm. By averaging these two numbers the FCA is attempting to produce a fairer outcome for consumers. Likewise, the interest calculation will add the Bank of England’s base rate per year plus 1% from the date of overpayment until compensation is paid which the FCA estimates to be 2.09% on average.

“Implementing this compensation scheme will be a significant exercise for finance companies who will need to review all of their DCA cases, assess whether they are unfair and then calculate potential redress. Once the consultation is completed lenders will have clarity over the FCA’s scheme to begin the process of contacting the over 4m customers who have made complaints, plus the remainder to be included in the scheme, to calculate and pay due redress to customers as soon as possible.”