Financial sector under scrutiny: Peers raise concerns over FCA's remediation plan related to motor loans
The Motor Finance Redress Scheme, launched by the UK Financial Conduct Authority (FCA), is currently under consultation and has sparked debate among industry leaders and regulators. The scheme aims to compensate customers who were treated unfairly in motor finance agreements dating back to 2007, primarily due to non-disclosure of dealer commission payments that led to customers paying more than they should have.
The FCA expects the scheme to be an industry-wide compensation scheme following a Supreme Court judgment that clarified when motor finance agreements could be unfair due to undisclosed commission. The regulator anticipates finalizing and implementing the scheme so that compensation payments can begin in 2026. The estimated total industry cost is between £9 billion and £18 billion, with most individual compensations under £950.
The FCA is considering whether the scheme should be opt-in or opt-out and whether there should be a minimum threshold for payment eligibility. However, concerns have been raised about the proposed scheme’s scope and timeframe by the House of Lords' Financial Services Regulation Committee.
The Committee, led by Lord Forsyth, argues that the current plan’s broad coverage back to 2007 may slow the process, delay payments, and impose excessive strain on lenders. They suggest adopting a six-year claims window consistent with the Consumer Credit Act, which would cover the majority of affected customers but reduce logistical challenges such as missing records and outdated contact details.
The Committee presses the FCA to balance consumer fairness with market stability, warning that the present approach could hamper the motor finance market. They also question the legal grounding the Financial Conduct Authority used to outline the timeframe for the redress scheme.
In response to industry claims that the motor finance redress scheme is impractical, FCA's chief executive, Nikhil Rathi, stated that now is not the time to negotiate but to help consumers. Rathi made these statements in an interview with the Financial Times, where he also mentioned potential administrative costs being in the billions.
Lord Forsyth has requested that the FCA appear before the committee in September to address these concerns. The committee also questions how the Financial Conduct Authority can substantiate its view on the scheme.
Anthony Coombs, chair of specialist lender S&U, believes the motor finance redress scheme presents the FCA with an opportunity to implement its 'regulate for growth' rhetoric. However, the scheme remains a topic of concern and debate among industry leaders and regulators.
The motor finance redress scheme is intended to ensure the integrity of the motor finance market. The House of Lords' Financial Services Regulation Committee has expressed concern about the upcoming motor finance redress scheme and has questioned the work done by the regulator to estimate administrative costs for a redress scheme dating back to 2007.
Stephen Haddrill, director general of the Finance & Leasing Association, has branded the timeframe as a "major concern" and "completely impractical". The FCA has urged firms to update their estimates, including both compensation liabilities and administrative costs.
In conclusion, the motor finance redress scheme is progressing with careful consultation, but political and regulatory bodies advocate narrowing its scope to ensure timely, feasible compensation and protect market health. The scheme's final cost is estimated to range from £9bn to £18bn, and the committee questions the legal grounding the Financial Conduct Authority used to outline the timeframe for the redress scheme. The debate is ongoing, with the FCA expected to address concerns raised by the House of Lords' Financial Services Regulation Committee in September.
The FCA anticipates that the motor finance redress scheme, aiming to ensure the integrity of the motor finance industry, will be an industry-wide compensation scheme due to undisclosed commission practices dating back to 2007. The scheme's estimated total cost, between £9 billion and £18 billion, has sparked concerns about its feasibility and impact on the market, with industry leaders and regulators continuing to debate the scheme's scope and timeframe.
The House of Lords' Financial Services Regulation Committee has expressed concerns about the scheme's broad coverage back to 2007, arguing that it could delay payments and impose excessive strain on lenders. They suggest adopting a six-year claims window consistent with the Consumer Credit Act to cover the majority of affected customers, thus reducing logistical challenges.
