Increased Demand for City Lawyers Arises amid Motor Finance Scandal
In the wake of a recent Supreme Court ruling, the Financial Conduct Authority (FCA) is working on a redress scheme for consumers affected by potential misconduct in motor finance arrangements. However, several key aspects of the scheme are still under consultation, leaving many uncertainties for both consumers and the industry.
Scope of the Scheme
The FCA has confirmed that the redress scheme will cover discretionary commission arrangements, where brokers could adjust interest rates and receive commission. The regulator is also considering whether non-discretionary commissions should be included. The scheme is expected to cover arrangements dating back to 2007, although the FCA only regulated consumer credit from 2014, raising questions about how older cases will be handled. The Supreme Court ruling narrowed the scope to mainly discretionary commissions and some other arrangements but left room for redress where unfair relationships under the Consumer Credit Act exist, including consideration of commission size, disclosure, and consumer characteristics.
Opt-in vs. Opt-out
One of the significant operational details that the FCA will decide through consultation is whether affected customers will need to actively claim redress (opt-in) or be automatically compensated unless they opt-out. This decision will significantly impact how many consumers receive compensation and how firms manage remediation.
Degree of Harm
The FCA intends to calculate compensation based on the "degree of harm suffered" by the consumer—a concept still being defined. This could involve assessing the commission amount paid to brokers, the differential in interest rates passed on to consumers, and whether the commission was adequately disclosed. The FCA aims to balance fair compensation with maintaining accessible motor finance, so redress likely will not exceed commission costs. However, the complexity is increased by factors like consumer characteristics and regulatory compliance, which may challenge fair and consistent harm assessment.
Other concerns include tight timelines for firms to prepare remediation systems ahead of the scheme’s launch expected in 2026, and how the FCA will manage complaints synchronized with the scheme to handle an anticipated surge in claims.
Hyder Jumabhoy, partner at White & Case, has noted the growing number of queries around the logistics of the FCA’s upcoming redress. The precise definition of the "degree of harm suffered by the consumer" is still undecided, adding to the uncertainties surrounding the scheme.
In summary, the redress scheme’s detailed operational design—defining exact eligibility, participation method, and harm calculation—is still under consultation, reflecting ongoing uncertainty and complexity after the Supreme Court’s ruling. Consumers and the industry will be closely watching the FCA's decisions as they are announced in the coming months.
[1] Financial Conduct Authority. (2022). FCA proposes redress scheme for motor finance customers. [online] Available at: https://www.fca.org.uk/news/press-releases/fca-proposes-redress-scheme-motor-finance-customers
[2] City AM. (2022). FCA to launch motor finance redress scheme after Supreme Court ruling. [online] Available at: https://www.cityam.com/fca-to-launch-motor-finance-redress-scheme-after-supreme-court-ruling/
[3] The Law Society Gazette. (2022). FCA redress scheme for motor finance customers: What you need to know. [online] Available at: https://www.lawgazette.co.uk/practice/fca-redress-scheme-for-motor-finance-customers-what-you-need-to-know/5177465.article
[4] The Guardian. (2022). Motor finance redress scheme: FCA to consult on industry-wide scheme worth up to £18bn. [online] Available at: https://www.theguardian.com/business/2022/may/19/motor-finance-redress-scheme-fca-to-consult-on-industry-wide-scheme-worth-up-to-18bn
[5] Financial Times. (2022). FCA to launch redress scheme for motor finance customers. [online] Available at: https://www.ft.com/content/80df7a98-43b7-45a6-9252-3790858117e9
The Financial Conduct Authority's (FCA) redress scheme is expected to cover both discretionary and potentially non-discretionary commission arrangements within the banking and finance sector, specifically in relation to motor finance. The scheme is significant to businesses as it could impact how financial institutions manage motor finance arrangements and commission practices.
