The Financial Conduct Authority is to consult on an industry-wide scheme to compensate motor finance customers who were treated unfairly. The City watchdog announced the move  before markets opened today following the Supreme Court’s judgment on Friday afternoon.

Many motor finance customers will not be entitled to redress for mis-selling following the Supreme Court’s ruling that car dealers did not owe  customers a fiduciary duty. But in Johnson v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance the court rules that a failure to properly disclose commission arrangements could render the relationship between a customer and the finance company unfair under the Consumer Credit Act 1974.

The FCA said today that the Supreme Court’s judgment had provided clarity, which ‘helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts’.

The FCA will propose rules on how lenders should ‘consistently, efficiently and fairly’ decide where someone is owed compensation and how much. It  estimates that most individual claimants will ‘probably’ receive less than £950 per agreement. The total costs of any compensation scheme could cost between £9 billion to £18bn depending on the final design of the scheme. The FCA said costs estimates were indicative and may change but it was ‘unlikely’ that the costs of the scheme, including adminiistering it, would be much lower than £9bn and could be up to £18bn in some scenarios.

‘A total cost midway in the range, as forecast by some analysts, is more plausible’, the FCA said.

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The consultation is expected to open by early October for six weeks. If the compensation scheme goes ahead, first payments should be made in 2026. The consultation will cover how firms should assess whether the relationship between the lender and borrower was unfair and, if so, what compensation should be paid.

The scheme is expected to cover agreements dating back to 2007 in order to ‘prevent large numbers of ongoing disputes in the courts’.

Nikhil Rathi, FCA chief executive, said: ’It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.

’Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get. It will take time to establish a scheme but we hope to start getting people any money they are owed next year.’

People who have already complained do not need to do anything while consumers who are concerned they were not told about commission and think they may have paid too much for their motor finance lender should complain now.

The FCA said: ‘Consumers do not need to use a claims management company or law firm and doing so could cost them around 30% of any compensation paid. Any redress scheme must be fair to consumers who have lost out and ensure the integrity of the motor finance market, so it works well for future consumers. The regulator will be working intensively and engaging widely over the coming weeks on the detail of how a scheme would work.’

 

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