The Financial Conduct Authority (FCA) may be forced to restructure its car finance redress scheme after a consumer group announced it would challenge the payout limit. According to reports, lawyers representing Consumer Voice have written to the City watchdog to give notice that it will contest the programme at a tribunal. The action could mean a delay or a restructuring to boost payouts for successful claimants.
The complaint is based on the FCA's decision to limit compensation following heavy lobbying by lenders. The final terms of the redress scheme set the total bill at £9.1bn, well short of the £44bn some analysts had suggested.
An FCA spokesperson said in a statement: "Our scheme is the quickest, fairest way to compensate consumers. It seems contradictory that organisations claiming to represent consumers would seek to delay payouts for millions of people."
Alex Neill, cofounder of Consumer Voice, said: "Consumers have been let down by the lenders who mis-sold them car finance. They should not be let down again by the regulator that is meant to protect them."
Why is legal action being taken?
Consumer Voice argues that the FCA has not focused on consumers, instead giving in to pressure from lenders and their lobbyists to limit the scheme in order to protect the car finance industry.
We reported on how last-minute changes were made to the scheme to limit its scope, in the face of intense lobbying. Rachel Reeves even sided with lenders last year to warn against large payouts, reportedly considering overruling the Supreme Court's initial decision that triggered the compensation scheme.
In contrast, the FCA argues that the scheme strikes a necessary balance between the interests of consumers and lenders.
How much do successful claimants stand to get under the current car finance redress scheme?
Under the scheme, the FCA estimates payouts will average £830, based on the expectation that 75% of affected consumers will claim.
The £830 average is higher than many had anticipated, but it stems from a last-minute change to the qualification criteria that narrowed the scheme's scope. It means the total industry bill is currently quoted at £7.5bn (plus £1.6bn in administrative costs), a disappointing outcome following earlier forecasts (£44bn from analysts and an initial £18bn from the FCA), which had suggested a much broader scale of redress than what is in the finalised plans.
Some consumers will receive more than £830 and some less, depending on the circumstances of their claim. The FCA expects 12.1m agreements will be considered unfair, but this does not translate to 12.1m people, as some consumers will have signed multiple car finance agreements in the qualifying period.
The payouts should be boosted by inflation, likely to be the Bank of England base rate plus 1%.
How will the car finance redress scheme work?
The redress scheme is for people who signed up to a car finance deal between 6th April 2007 and 1st November 2024.
The main targets are deals that featured a discretionary commission arrangement, or DCA. These agreements involved the dealer receiving an undisclosed commission based on the rate of interest charged to the borrower. DCAs were banned by the FCA in 2021 for being unfair to consumers, as they essentially incentivised dealers to set higher rates of interest.
The scheme will also include some car buyers who signed deals paying an excessive amount of commission, defined as at least 35% of the total cost of the credit and 10% of the loan, or buyers who were given inaccurate information on the best deals available because of an exclusivity agreement between a lender and a car dealer.
The FCA estimates that 14.2m unfair agreements were signed over the qualifying period, which is 44% of all agreements made since 2007.
What could happen next?
Whether the scheme goes ahead as planned or not, it is still a good idea to put in a claim if you think you have been affected. We explain how to make a claim here.
The legal action will frustrate the FCA, which had hoped its redress scheme would bring the car finance scandal to an end. The FCA will instead have to present its case to an upper tribunal judge, who will review the programme and the arguments against it.
This would mean delaying payouts, which had been expected to begin this summer. It could also mean the scheme is reassessed and payout amounts are changed. This could then open the door for lender groups to bring their own legal action against the FCA.
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