Motor finance complaints – the next industry-wide redress scheme?

In the very fast-moving world of motor finance complaints, the Financial Conduct Authority (FCA) recently announced that it will likely consult on a potential redress scheme for customers affected by discretionary commission arrangements (DCAs) in respect of motor finance. This development follows a series of legal proceedings into the transparency of commission disclosures in the motor finance sector, as well as the news that the Financial Ombudsman Service has received a record number of complaints in this area.

Background on DCAs

Discretionary commission arrangements allowed car dealerships and brokers to set higher interest rates on loans in exchange for increased commissions. Recent complaints have alleged that such arrangements took place without the customer being adequately informed. The FCA banned DCAs in January 2021 due to concerns about consumer detriment, however historic DCAs (those made between April 2007 and January 2021) are the subject of the FCA’s current review.

In October 2024, the Court of Appeal ruled in Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcroft v Close Brothers [2024] that it was illegal for car dealers to receive commissions from banks without informed customer consent. This decision has significant implications for the motor finance industry, potentially leading to compensation liabilities estimated between £30bn and £44bn. The Supreme Court is scheduled to hear the appeal on these matters between 1 and 3 April 2025 with the FCA planning to outline its next steps, which may include consulting on a redress scheme, by May 2025. 

What might a redress scheme look like

If a redress scheme is authorised, lenders and brokers will be required to contact any customer that might have been impacted and invite them to take part in the review.

The FCA’s power to impose industry-wide consumer redress schemes is granted under Section 404 of the Financial Services and Markets Act (FSMA). This would only be the third time the FCA has exercised the power, with the other two times being:

• Arch Cru Funds in 2013: The FCA implemented a redress scheme for investors who received unsuitable advice to invest in the CF Arch Cru Investment and Diversified Funds.
• British Steel Pension Scheme (BSPS) in 2022: The FCA established a redress scheme for former BSPS members who were misadvised to transfer out of their defined benefit pension scheme between May 2016 and March 2018.

What the past reviews have shown is that redress is not always as high as anticipated. In both Arch Cru and BSPS, the amount of redress paid out was significantly less than expected. The reduced payouts were partly due to external factors and so is not necessarily a reflection of what might happen here.

Comment

The FCA’s consideration of a redress scheme for mis-sold motor finance agreements underscores its commitment to consumer protection. Despite this news, a redress exercise is not a done deal. The FCA will likely announce a public consultation, to consider the scope and extent of any redress exercise. However, if it is implemented, it could lead to substantial compensation for affected customers.

We await the forthcoming Supreme Court decision with interest.