- The FCA believes the motor finance sector’s redress bill could total £44bn
Britain’s financial regulator has warned that consumer costs could soar if any compensation linked to the motor finance commission scandal results in corporate bankruptcies.
It comes ahead of a closely watched Supreme Court decision on discretionary commission payments due next month that could see lenders shouldering a collective bill of £44billion.
The court will decide whether to uphold a previous ruling that several such payments were unlawful, which could lead to consumer redress at the scale of the notorious PPI scandal.
The Financial Conduct Authority said on Thursday that any compensation plan must ‘ensure the integrity of the motor finance market, so it works well for future consumers’.
The car finance sector is concerned that it might be left with a massive bill for individuals who bought vehicles using loans that involved a discretionary commission arrangement (DCA) before January 2021.
Barclays has set aside £90million in potential redress payments, while Santander has reserved £295million, and Lloyds Banking Group a whopping £1.2billion.
Ratings agency Moody’s has predicted that the industry might fork out £30billion, while the FCA has warned it could total £44billion.
‘We’ve seen a range of redress rates suggested,’ said the FCA. ‘This includes some highly speculative figures by some CMCs (claims management companies) and law firms.’
Caution: The FCA warned that consumer costs could soar if any compensation linked to the motor finance commission scandal results in corporate bankruptcies
It added: ‘If many firms were to go out of business or withdraw from the market, this could reduce competition and could make it more expensive for consumers to borrow money to buy a car in the future.
‘Where firms fail, customers may not get any redress, as motor finance isn’t covered by the Financial Services Compensation Scheme.’
DCAs allowed car dealerships and brokers to determine the interest rate on a vehicle buyer’s finance deal, which incentivised them to charge more expensive loans.
High volumes of motor finance customers have since complained that they did not receive sufficient information on DCAs before they were banned.
A landmark Court of Appeal ruling last October declared it was unlawful for lenders to give car sellers commissions without a customer’s informed consent.
The Supreme Court heard an appeal against this court decision in early April and is set to deliver a final judgement on the matter sometime during the summer.
Within six weeks of a verdict, the FCA will confirm whether to introduce a consumer redress scheme, as well as the timings for issuing a consultation on how such a plan would work.
Among the concerns would be whether to have an opt-in scheme, where customers must actively confirm to their firm that they want to be included, or an opt-out scheme, with consumers automatically included unless they intentionally withdraw.
Darren Richards, head of Broadstone’s insurance, regulatory and risk advisory division, said: ‘It is clear that the decisions behind the design of a redress scheme are complex and need to balance fairness for consumers and the integrity of the motor finance market.’
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