Final destination – FCA publishes proposals for motor finance consumer redress scheme

After a long and tortuous process, covering pauses to complaint handling timeframes, FOS decisions, judicial reviews and Supreme Court decisions, the FCA has finally published its consultation paper ("the Consultation ") on a motor finance Consumer Redress scheme ("the Scheme") under s.404 of FSMA. The sums at stake (£8.2 billion) are considerably lower than some of the eye watering previous estimates but the potential exposure is still significant. The deadline for comments is 18 November.

The Consultation opens with the FCA discussing how its review of the motor finance market found widespread failings on both the disclosure of commissions and ties between lenders and brokers, meaning people 'may have overpaid on their motor finance.' The FCA stresses that 4 million consumers have complained to date and that, where firms have considered complaints, 99% were rejected. Regular readers of these pages will recall that this rejection rate seems to have been the catalyst (or at least a catalyst) for the FCA's interest in this area following the banning of discretionary commission arrangements ("DCAs") in 2021.

The opening section of the Consultation covers the background and what brought us here, including the judicial review of a FOS decision (upholding a complaint) by Clydesdale and the Supreme Court decision in Johnson v FirstRand Bank (discussed here). On the latter, the FCA references one of the conjoined claims (Johnson) which was upheld due to a high, undisclosed commission and the failure to inform the borrower of a commercial tie between the lender and finance broker (who was also the seller of the vehicle). Much of the scope and form of the Scheme seems to have been informed by this, despite the majority of transactions to be reviewed not sharing the same characteristics as Johnson (as discussed below).

The proposed scope of the Scheme is very broad, covering all motor finance agreements taken out between 6 April 2007 and 1 November 2024. Predictably, one of the key areas of focus is DCAs. Under such arrangements a finance broker could vary the rate of interest payable on a loan, with a commensurate increase or decrease in their commission. One could argue that the timeframe is too broad, not least because this significantly predates when primary limitation will have expired and a period of some three years after DCAs were banned. We discuss limitation further below, but the FCA justifies the latter on the basis that it was not until the Court of Appeal decision in Johnson v FirstRand Bank that they knew firms had moved to more transparent pricing models. The FCA also proposes that lenders will deliver the Scheme rather than brokers, on the basis that this will be simpler and allow for more timely redress.

So, in what circumstances is redress likely to be payable? Whilst the FCA states that not all consumers who took out motor finance will be owed compensation, they still estimate that 14.2 million agreements (44% of those taken out since 2007) will be considered unfair. A relationship will be considered unfair if there is inadequate disclosure of one or more of the following:

• A DCA.
• A high commission arrangement (being one with commission equal to or greater than 35% of the total cost of credit and 10% of the loan).
• Tied arrangements that gave the lender exclusivity or a first right of refusal.

The relationship will be deemed fair if none of the factors above are present.

The starting point will be that there is a rebuttable presumption of an unfair relationship if one of the above arrangements were present and there was not adequate disclosure. Cases will also be excluded if a matter has been referred to FOS, if redress has been accepted, if no commission was payable or if a case has been decided by the Court.

Predictably, the FCA sets a fairly high bar on what would constitute adequate disclosure - disclosure of such an arrangement will be adequate if clear and prominent information was provided, and not (for example) hidden in small print. For DCAs, this will also require disclosure of how commission was linked to the interest rate charged (effectively, the FCA wants there to have been full disclosure of the existence and nature of commission). The FCA also proposes that lenders should presume disclosure was inadequate unless it can be proven to the contrary. This is particularly significant for cases where documents are no longer retained, as it will be nigh on impossible to argue that the relationship was not unfair as there will simply be no evidence of disclosure available.  

Assuming an unfair relationship exists, redress is generally to be calculated "at the average of an estimation of loss based on the method we decide and the commission paid." Obviously, this means that customers may not be compensated based on the actual loss suffered – the approach instead averages out an APR adjustment remedy and a commission repayment remedy (as applied in Johnson). The FCA's research has found that DCAs in general generated commission between 20% and 40% higher than a flat fee model. Such customers will effectively be repaid based on the proposed hybrid model. The FCA notes that a 'loss based' APR adjustment remedy for DCA cases would result in a 17% difference in APR – this has been rejected as an approach to redress as it is considered it could risk under compensating consumers.

For cases involving a contractual tie between lender and broker and high commission (as discussed above), customers will receive repayment of commission plus interest (but the FCA opines that such cases will be rare). The FCA found that on average, for every £1 of commission paid under such arrangements, the cost of credit rose by £0.60.

Overall, the average redress payment is anticipated to be £700 and 85% of consumers are expected to take part in the Scheme. As mentioned above, the total redress payable is estimated at £8.2 billion. The cost to firms implementing the Scheme is estimated to be £2.8 billion. Despite these costs, the FCA assumes there will continue to be good product availability, although they cannot rule out "some modest impacts…on pricing" which seems fairly optimistic. On redress, the FCA has opted against a 'de-minimis' threshold, which would have excluded cases where the cost of review would exceed the redress amount. However, lenders do have the option of settling cases without completing all the stages of the process, thus allowing them to avoid the full costs of investigating a file (in such circumstances lenders also have the option of simply repaying commission rather than completing the hybrid calculation).

As regular readers will know, the FCA's interest in this area was prompted by the widespread use of DCAs. The FCA has looked at 3,333 DCA files and found that the borrower was informed that commission would be paid in 0 cases, with 60% of customers being told that commission 'may' be payable and there being insufficient evidence on file in respect of the remaining 40%. Similarly, only 4% of consumers with non-DCA arrangements were told of the amount of commission to be paid. On tied relationships, across 570 files reviewed, a 'right of first refusal' was identified in 29% of cases, of which only 10% were disclosed to the consumer. Based on their research, the FCA estimates that an unfairness indicator will be present in 37% of DCA cases and that 9.5% of cases will show an inadequate disclosure of high commission and 10.5% showing inadequate disclosure of a tied arrangement.

One positive to note is that the Scheme will proceed on an opt-in basis, with lenders required to invite consumers to decide whether or not they want their case assessed.

Discussion

The scope of the FCA's review might be largely as anticipated following Johnson, at least in terms of the type of arrangement. It was always unlikely that any redress scheme would exclude DCAs and the Johnson decision perhaps made it inevitable that this would encompass the types of arrangement deemed unfair under the Consumer Credit Act 1974. However, there are some questions to be asked around what the FCA is envisaging.

First and perhaps most importantly, the timeframe for the review is broad; at present primary limitation will have expired in respect of all arrangements taken out before October 2019 (and this date will continue to move forward until the Scheme rules are published). However, the FCA envisages going back to 2007 (being roughly the date when the relevant sections of the CCA came into force and FOS began to take responsibility for handling consumer credit complaints). The FCA addresses limitation by stating that, under s.32(1)(b) of the Limitation Act 1980, the six-year timeframe will not start to run if a fact relevant to the claim has been deliberately concealed from the claimant, with time only starting to run from when the claimant could with reasonable diligence have discovered that fact.

The FCA's view is that a failure to disclose adequate features of the commission arrangement will amount to deliberate concealment that the consumer "could not with reasonable diligence have discovered." However, following Canada Square Operations Ltd v Potter, there must be an intention to actually conceal the fact in question for s.32 to operate. It's questionable to what extent any failure to disclose a DCA (for example) would be deliberate rather than simply not something that brokers would do as a matter of routine, based on their interpretation of the FCA's Guidance at the time. We also question to what extent s.32 could apply if a customer was told that commission 'may' be payable, given that this clearly would put a customer of reasonable diligence on a path by which they could have discovered the specifics of the commission had they been inclined to do so (although of course the FCA disagrees with this analysis).

The FCA also brushes over the issues caused by the lack of records retained for agreements going back to 2007, seeming to conclude that, as there were issues with disclosure in later cases, it will presumably be the same with earlier cases. Lenders may also face considerable difficulty in contacting consumers where records of the transaction have not been retained, as they may well not have any contact details.

We also question to what extent DCA arrangements should be treated as being 'unfair' en-masse. Based on Johnson, motor finance brokers are unlikely to owe a disinterested duty (or a fiduciary duty), and it seems reasonably likely that at least a proportion of DCA customers would have received an interest rate that was commensurate with what was available on a flat fee basis. In such circumstances, it's hard to see how any unfairness arises.

Similarly, there is a rebuttable presumption under the Scheme that an unfair relationship will have caused damage. Using DCAs as an example, this presumption could be rebutted if the lender can demonstrate that the broker applied the lowest rate within the permitted range (which is unlikely to have been the case, given that this presumably would have meant no commission was payable). However, it seems unfair to require redress to be paid if the rate actually applied was reasonable, especially in the absence of any assessment of what other rates were actually available, and on the basis that the consumer was minded to purchase the vehicle.

The FCA justifies its approach based on the Court's wide powers of remedy under the CCA, noting that in Johnson the Court did not have to consider causation and measurable financial loss. That may be correct, but the Johnson case did not concern a DCA, and the bulk of the transactions to be reviewed under the Scheme will involve a DCA. It has not been established that such arrangements are unfair per se for the purposes of the CCA, nor will brokers have been under a fiduciary or disinterested duty, so it seems questionable to what extent any redress should comprise a commission element.

This follows on to some concerns about causation – presumably the majority of customers were primarily motivated to purchase the vehicle, and a proportion would almost certainly have done so regardless of the nature of the disclosure of commission. The FCA sidesteps this by stating that the Supreme Court did not need to consider causation in Jonhson (and 'causation' is mentioned twice throughout the Consultation), but this again ignores the fact that the majority of files subject to the review will not be on all fours with Johnson.

Overall, a redress scheme has been anticipated for some time, and it was always the case that there would be some knotty questions around limitation, causation and loss in particular. The Consultation arguably doesn’t adequately address these issues. We also question the approach taken on limitation and the presumptions of unfairness. It's positive that the overall redress bill has decreased so significantly, and it's encouraging to see the inclusion of an opt-in. However, we anticipate there may be some push back.

The Consultation has two deadlines – 4 November for views on proposals to extend the complaint handling rules, and 18 November for the redress scheme proposals.  We will keep an eye on this, so be on the lookout for further blogs as and when the FCA's policy statement alongside the final rules are published, which are expected early 2026.

This isn't however a moment to wait and see, the FCA has been keen to communicate to both motor finance lenders and brokers that there is work to do now while they await the outcome of its Consultation, and has set out these actions in a Dear CEO letter published on 7 October.