The Financial Conduct Authority (FCA) has announced it will begin setting up a compensation scheme for consumers who were unlawfully sold car finance, unaware their car dealership was receiving a comission from the finance company.
Three people took their cases to court, with a court of appeal ruling in their favour in October.
On Friday the Supreme Court upheld just one of these cases, originally filed by a borrower named Marcus Johnson, due in part to the size of the commission the lender paid to the car dealer, and how it was disclosed.
The part defeat came as a blow to consumers who had expected compensation payouts to total close to £44 billion.
Acknowledging the Supreme Court’s ruling, the FCA say judges agreed with several of the points they raised which could lead to an unfair and unlawful relationship between lenders and car dealerships.
What could make a sale of car finance unlawful and entitle you to compensation?
- The size of the commission relative to the charge for credit.
- The nature of the commission, for example, whether it is discretionary.
- The characteristics of the consumer.
- Compliance with regulatory rules.
- The extent and manner of disclosure.
Any compensation scheme proposed by the FCA will depend on the non-disclosure of the above factors and the “interaction between them.”
The FCA predicts the total amount of compensation owed to consumers could reach as high as £18 billion and it does not expect a payout lower than £9 billion.
In reality, estimates somewhere around the midpoint of these two figures seem more plausible.
In the case upheld by the Supreme Court, part of the justice’s reasoning relied on the high commission relevant to credit, in this case 55%, something they described as “a powerful indication” of an unfair relationship.
The court also found that this was a breach of FCA rules, as disclosure of so high a commission would have had a “material impact” on the customer’s decision.
In establishing a repayment scheme, the FCA will need to assess what level of commission should qualify for compensation
If your car finance was unfairly sold how much could you be owed?
The FCA’s 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 extent to which individuals will be entitled to compensation will in part be informed by the degree of harm they suffered, as well as the need to ensure consumers continue to be able to access affordable loans for motor vehicles.
In the case of Marcus Johnson, upheld by the Supreme Court, justices decided the appropriate compensation would be the payment of the commission his car dealership received.
The FCA says it will consider this option alongside alternative approaches.
It is unlikely any alternative would lead to higher payouts than the full comission and the FCA said some could lead to lower payments.
Consumers receiving financial settlements could also be entitled to interest, which the FCA said could amount to around three per cent per year.
What time period will these claims cover?
The FCA says it intends its compensation scheme to cover a time period as far back as 2007.
This will make the scheme consistent with complaints handled by the Financial Ombudsman.
The FCA says it hopes this time frame will prevent a backlog of cases making their way through the court system and is discussing with the government the best way of doing this.
Car finance companies will be required to adequately inform their customers of any financial redress scheme and what they may need to do if eligible for compensation.
The FCA says it has not yet decided whether any payout scheme will require effected consumers to “opt-in” or “opt-out”.
What should you do if you believe you were missold car finance?
The FCA says if you have already complained, you don’t need to do anything.
It adds: “Our advice remains that consumers concerned that they were not told about commission and who think they may have paid too much for the finance, should complain now.”
Both the FCA and Consumer Expert Martin Lewis advise consumers to not join any claim management companies (CMC) or law firm’s joint claims.
The former claims the scheme they establish will be easy to participate in and signing up with a CMC could cost up to 30% in fees from any compensation they receive.
Over the last year, the FCA has required 225 promotions from CMCs on motor finance to be amended or withdrawn, including some which were highly speculative in suggesting the compensation consumers may get.
The FCA intend to publish the framework for this copensation scheme in October.
They said: “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.”
They added, consumers should expect to begin receiving compensation next year.
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