FCA slashes banks’ motor finance payouts as compensation scheme finalised
City banks are set to face a more than £9bn motor finance bill after the UK’s financial watchdog laid out plans for its long-awaited motor finance redress scheme in a major U-turn after months of backlash.
The Financial Conduct Authority (FCA) revealed the details of its industry-wide redress scheme for the car mis-selling saga on Monday and lenders were handed crucial reprieve with the overall costs set to come in at £9.1bn, lower than previously expected.
Costs have been slimmed after the number of qualifying agreements for the scheme dropped to 12.1m from 14.2m.
It follows consultation on initial proposals for the regulator’s scheme in October that estimated motor finance lenders would be slapped with a £11bn bill. The figure was made up of £8.2bn in compensation payments – which averaged at £700 – and an additional £2.8bn in administrative costs for firms implementing the scheme. Compensation payouts in the final scheme are estimated to top £7.5bn.
October’s proposals triggered fierce contention, with banking giants accusing the FCA of mis-interpreting the Supreme Court’s summer ruling on the saga.
Despite less people being eligible for the new scheme, the regulator anticipates an average payout of £830.
“We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5bn back into people’s pockets,” said Nikhil Rathi, chief executive of the FCA.
But a major contention for the first scheme remains in place, with deals going back to 2007 still set to be included. The FCA has said it would run two schemes, one for 2014 to 2024 deals, which will allow payments to begin being made this year, and a second relating to deals pre-2014. The deadline for this scheme to be set up is August 2026.
Rathi said on Monday: “It’s time for lenders to put right the fact they broke the law.”
Defending the timeframe, the watchdog chief said liabilities existed back to 2007 and they needed to be “dealt with one way or another”.
Peter Rothwell, head of banking at KPMG UK, said the multiple schemes may help “speed up the process for consumers” but also risked “confusion for others”.
Manufacturers were handed a major loophole in the final redress, with lenders and dealers that share a brand name – such as BMW financial services and BMW the dealer – being exempt from the “tied arrangement” rule, which covers the “hidden” deal between brokers and a finance company.
Motor finance scheme changes after industry row
In August, the highest court in the land partially overturned a ruling from the Court of Appeal, that the use of discretionary commission arrangements (DCAs) – ‘secret’ commission paid by lenders to car dealerships without consumer knowledge – were illegal.
But justices opened the door for the City watchdog to introduce a redress scheme on the grounds of “unfairness,” after ruling in favour of consumers on one out of the three cases brought to the Court, finding that the 55 per cent commission charged was outsized.
The proposals outlined in October sparked controversy with lenders after the FCA set its benchmark for eligible high commission at 35 per cent. The watchdog increased this threshold to 39 per cent in the final publication. Banks will also no longer have to payout if the commission was under £120 pre-2014 or £150 post-2014.
In around one third of cases, compensation is set to be capped to curb consumers ending up with a higher payout than they would have been with a fair deal
Shanika Amarasekara, chief executive of the Finance & Leasing Association, said: “Any redress scheme for a market of this size must accurately identify and compensate only those customers who genuinely suffered loss.
“If it is drawn too broadly so that it also compensates customers who suffered no loss, the only real winners will be claimant law firms and claims management companies”.
The initial proposals had led to almost all banks with exposure hiking their provisions drastically. Lloyds Banking Group – which owns the UK’s largest motor finance lender Black Horse – raised its reserves to £2bn, from £1.2bn.
Charlie Nunn, the bank’s chief executive, warned: “When you look at the implication of what’s been proposed by the FCA, it’s going to potentially take 20 years of profitability off the car finance industry.”
The government has maintained a close eye on the unfolding events, with Rachel Reeves previously attempting to intervene in the legal battle over fears it could harm investment into the UK’s financial sector. The Chancellor was ultimately refused by the top Court.
The win for lenders is expected to spark some controversy for consumers and the claims management companies, which have seized on the scandal with aggressive advertising stunts. Claims firms have been struck down by the FCA and solicitors watchdog, with the regulators cautioning consumers against ‘no win no fee’ firms that were hitting consumers with ‘exit fees.’
The All-Party Parliamentary Group (APPG) on Fair Banking warned following the FCA’s initial proposals that the regulator had left a £4.4bn gap favouring the lenders.