Any claimant pursuing court action in the hope of securing a higher level of compensation for mis-sold car finance will be excluded from the official redress scheme, the Financial Conduct Authority revealed today.
The City regulator announced final rules for the scheme, under which it said 12.1 million car-buyers would be eligible for compensation. At the consulttation stage, the FCA had said that 14.2 million car finance agreements between 2007 and 2024 would be eligible.
The FCA said it had tightened eligibility so that only those treated unfairly will receive compensation. That means agreements involving minimal commission or zero APRs will not be suitable for redress. It has adjusted how compensation is calculated, to ensure consumers are not put in a better position than they would have been had they been treated fairly, which means around one in three cases compensation will be capped.
Law firms and claims management companies have signed up thousands of potential clients to mount motor finance claims, but the FCA continues to urge consumers not to go to a lawyer. The regulator said today: ‘There is no need to use a claims management company or law firm. If you do, you could lose over 30% of any money you get.’
In a media briefing, the watchdog stated that anyone pursuing court action in the hope of securing a higher level of compensation would be automatically excluded from the scheme. Nikhil Rathi, FCA chief executive, said there was no 'compelling evidence' that consumers would get a better outcome by joining any class action, and that there would be 'considerable risk and uncertainty' from pursuing the court route.
'All law firms are going to have to consider what is in their clients' best interests,' he added.
The FCA estimates that three-quarters of eligible consumers will make a claim. The estimated total bill to lenders has fallen from £11bn to £9.1bn. Compensation will be paid by the end of this year to people who have already complained, and by the end of 2027 for those that have yet to complain.
About 90,000 consumers whose cases align closely with the Johnson case considered by the Supreme Court will receive redress of all commission plus interest. These are cases involving an undisclosed contractual tie and/or discretionary commission arrangement (DCA), and very high commission of at least 50% of the total cost of credit and 22.5% of the loan.
For all other cases, consumers will receive the average of estimated loss and the commission paid, plus interest (referred to as the hybrid remedy). The estimated loss is based on economic analysis showing a difference in the APR on DCA loans compared with those with flat fee arrangements.
Rathi said: ’We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5 billion back into people’s pockets.
‘Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure. Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.’
Meanwhile, the FCA has announced a new taskforce with the Solicitors Regulation Authority, Information Commissioner’s Office and Advertising Standards Authority to step up action against rogue operators.
The organisations will share intelligence on how CMCs and law firms are marketing themselves and what they are telling clients about the value of their claims. They pledged to take swift action to tackle unsolicited and misleading advertising, meritless claims, multiple representation, and unfair exit fees.
Alison Walters, director of consumer finance and FCA taskforce lead, said: 'Our scheme will be free and people don’t need to use a CMC or law firm. Should they decide to do so, it’s important that they can trust CMCs and law firms to act in their best interests. This taskforce will ensure we deal with problems quickly and decisively.'
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