Andrew Foyle

The choice to make the announcement after the financial markets had closed mirrored the Supreme Court’s approach last August. However, it has given the markets just one night to ruminate on the latest FCA announcement, as opposed to the court allowing affected parties a full weekend to consider the matter. 

However, one night may be enough. Whilst the FCA’s scheme (running to 584 pages) will now be scrutinised carefully by lenders who have already provisioned billions of pounds in anticipated compensation, the initial outlook is cautiously optimistic. The scheme appears to strike the necessary balance between consumer and lender interests, albeit with one major battleground on the horizon.

Background

To briefly recap, this scheme has arisen from commission paid by lenders to dealers when those dealers brokered a finance agreement for the purchase of a vehicle. It follows clarification of the law by the Supreme Court, meaning the primary focus is now on fairness to consumers.

Commission was paid in a variety of ways. The most egregious examples were so called “discretionary commission arrangements” (DCAs), where dealers had discretion over the rate of interest to be applied and were rewarded better for agreeing higher interest rates. Those arrangements were banned outright by the FCA in 2021. It’s difficult to argue that consumers should not be allowed to seek redress in instances where they were left financially worse off due to a broker seeking to maximise their commission. 

Additionally, there is a distinction to be drawn between disclosed, undisclosed and partially disclosed (i.e. where consumers were told commission was payable, but not the amount) commissions. There was a concern that partially disclosed commissions may have made it into the scheme.

The scheme

The scheme announced yesterday applies to three types of arrangement between the lender and the dealer:

1. DCAs which allowed the dealer to adjust the interest rate to obtain a higher commission;
2. High commission arrangements, where the commission was at least 39% of the total cost for credit and 10% of the loan; and
3. Contractual arrangements which gave the lender exclusivity or first right of refusal, unless there were visible links between the manufacturer and the dealer (i.e. that it was clearly the “in-house” lender of the motor manufacturer).

The period covered by the scheme

The focus of scrutiny by lenders is likely to centre on the period that the scheme covers. The FCA have confirmed their initial indications that the scheme would cover agreements dating back to 2007. Their position is that the greatest harm to consumers was taking place between 2007 and 2014. They reasoned that if the scheme did not cover that period, it would increase costs for all concerned, for it would require individual complaints to the ombudsman and the courts. 

The FCA have recognised, however, that this may prove to be a battleground. Consequently, they have opted to introduce not one but two schemes. The first covers agreements between 6 April 2007 and 1 November 2014. The second for agreements post 1st November 2014. The intention is that the second scheme can progress, even if the first is challenged through the courts, thereby minimising delays to redress. 

There are clear evidential issues for lenders and consumers alike in trying to locate documentation going back almost 20 years. There is also the curious question of Scottish claims for redress which are likely to be subject to prescription (and might therefore be extinguished in law). Unlike English claims, which might be statute barred, but still technically exist. It is quite possible that this element might attract a challenge by lenders.

The good news for lenders

Nevertheless, there is much for lenders to like in the scheme. Most notably, it’s cost. Originally estimated at over £11 billion, the scheme has now been downgraded to £9.1bn. The estimated number of affected agreements has also reduced by almost 2 million, to an estimated 12.1 million agreements following consultation. 

The FCA have also made various exclusions from the scheme. These include cases with low commission (below £120 for pre-2014 and £150 for post-2014 agreements); cases where interest wasn’t charged; and cases where a DCA was in place but was not actually used to earn discretionary commission. The FCA have also excluded the top 0.5% by value of agreements from consideration, for they were considered unsuitable for a mass redress scheme.

Whilst the most serious cases (around 90,000 customers) will receive all commission plus interest, the FCA have capped the level of compensation payable in around one third of cases to the lower of (a) 95% of the commission, plus interest, or (b) the total cost of credit. There is a difference of approach between the pre-2014 and post-2014 as regards DCA loans, reflecting the higher average APR rates of interest applied to those loans. The guiding principle is that no consumer should be compensated more than if they had been treated fairly.

Implementation

The FCA have also allowed for a short implementation period so that firms can prepare for the scheme. For pre-2014 loans, this period will end on 31 August 2026. For loans taken out after 1 April 2014, the period will end on 30 June 2026. The FCA’s hope is that millions of consumers will be compensated this year, with the remainder finalised by the end of 2027.

Conclusion

The scheme follows a consultation period which garnered over 1,000 responses. The FCA appear to have made changes to the scheme to accommodate some of the consultation feedback. The backdating of claims to 2007 is still likely to be a bone of contention, though the overall scheme is perhaps better than many lenders might have feared. 

With billions of pounds at stake, lenders will nevertheless be closely scrutinising the scheme, and there will no doubt be much more to come in the coming days and weeks as the detail is absorbed.

Andrew Foyle is a solicitor advocate at Shoosmiths