FCA puts industry cost for motor redress at £9-£18bn, says ‘some firms’ broke law

The Financial Conduct Authority (FCA) will consult on a redress scheme for mis-sold motor finance by early October, following Friday’s decision by the UK Supreme Court.

The FCA said on August 3 that it expected average redress from the scheme to be “less than” £950, and that loan providers would face a total bill of between £9 billion and £18 billion.

FCA chief executive  Nikhil Rathi said the regulator was moving forward with proposals for an industry-wide redress scheme after finding evidence that “some firms have broken the law and our rules”.

The FCA declined to say if any motor finance providers had been referred to its enforcement division.

The Supreme Court decision in the cases Hopcraft v Close Brothers Limited, Johnson v FirstRand Bank Limited, and Wrench v FirstRand Bank Limited has clarified that paying of commission is not a bribe and that motor dealers do not owe a fiduciary duty to individuals taking out car loans.

However, the Johnson decision means there is still potential for redress for motorists beyond those who took out a loan involving a discretionary commission arrangement (DCA). This is because the Supreme Court said that under Section 140A of the Consumer Credit Act Johnson was owed redress.

The commission paid to the broker in Johnson’s case amounted to 55% of the total cost of credit, which president of the Supreme Court Lord Reed said, in his hand-down summary, was a “powerful indication that the relationship was unfair”.

The court further found it was “highly material” that documents “were intended to create the completely false impression” that the dealer would select the best deal for Johnson from a panel of dealers.

Johnson’s lack of sophistication was also a factor in the courtʼs decision. Lord Reed said: “The court questions the extent to which a finance company could reasonably expect a customer to have read and understood the detail of such documents, particularly when no prominence was given to the relevant statements.”

The FCA said that following the judgement, it had decided all DCA agreements that were not properly disclosed would be in-scope of the industry-wide scheme, and it would also consult on including any other commission arrangement that amounted to an unfair relationship.

Redress scheme

Rathi said the FCA wanted “a compensation scheme that’s fair and easy to participate in” so that motorists did not have to resort to using claims management firms. The FCA is proposing that each loan provider administers redress for mis-selling to its own customers , although it said it will “monitor if firms are following the rules” of the scheme and “act if they are not”.

The regulator has not yet decided if its scheme would require all customers who took out motor finance between 2007 and January 2021 to be automatically opted-in.

The Supreme Court said FirstRand should pay Johnson a “commercial rate of interest” on the commission it ordered to be returned. It is not known what the percentage interest rate will be. The judgment merely states that it must be agreed by the parties.

The FCA said it is likely to consult on applying an interest rate of 3% per year to any redress due.

It is also not clear if the cases currently sitting at the Financial Ombudsman Service (FOS) would be passed back to the banks. The FOS said this morning that it was aware of the judgment and was considering its impact on complaints about related issues.

Supreme Court

The Supreme Court delivered its verdict on August 1 at 4.35pm. Lord Reed explained the timing was at the request of the FCA, which was concerned that regardless of the outcome of the appeal, if it was delivered “during trading hours” there could be “market disorder”.

He also explained why the court had refused permission for the Treasury to intervene in the case: “Their application was refused as their arguments concerned the economic consequences of the Court of Appeal’s decision. The Supreme Court is only concerned with the legal issues in the case.”

Barclays case

At the beginning of July, the Court of Appeal paused hearing of a separate case, pending the Supreme Court decision on the above cases.

In Clydesdale Bank (Barclays) v the Financial Ombudsman Service, the bank is attempting to overturn a decision about the sale of a motor loan involving a DCA. It was the decision by the FOS in this case that, along with a decision against Lloyds Bank-owned Black Horse, triggered the FCA industry-wide investigation in January 2024.

The case is scheduled to be heard on September 16-18.  

Total cost

The FCA issued reminders on Sunday that “prudential rules require regulated firms to maintain adequate financial resources” and that listing rules require firms to “keep the market properly informed”.

The regulator suggested affected lenders should “refresh their estimates” of their potential liabilities for redress, “increasing them where necessary”. Listed firms are also required to update the markets if they are the subject of any regulatory enforcement action.