Motor finance commission claims: FCA leaning towards consumer redress scheme in 2026?

Announcements made by the FCA on 30 July 2024 suggest that motor finance commission claims could be the subject of a consumer redress scheme implemented in 2026. Whilst the FCA are keen to stress that nothing has been decided yet and various options remain on the table, a consumer redress scheme appears to be a more likely outcome than it was prior to the FCA commissioning a skilled person’s report into the motor finance market six months ago.

Background

• Consumers have been bringing complaints and claims for compensation against motor finance firms and credit brokers (including motor dealers) for discretionary commission arrangements (DCAs) in motor finance agreements entered into before 28 January 2021 (when DCAs were banned by the FCA). Claims have been progressing through the county courts and complaints have been made to the Financial Ombudsman Service (FOS).
• On 11 January 2024, the FOS published two Final Decisions upholding complaints against lenders who used a DCA and awarding compensation to the consumers. Compensation was calculated as the difference between the interest rate the customer paid and the lowest interest rate which the lender would have been prepared to offer them under the DCA model plus interest at 8%.
• Also on 11 January 2024, the FCA announced that it was instructing a skilled person’s report under section 166 of FSMA 2000 to review historic finance commission arrangements and sales across several firms. To allow time for this work to take place, the FCA paused the 8-week deadline for firms to provide a final response to existing or future FOS complaints until 25 September 2024. In respect of final responses issued during the period 12 July 2023 to 21 November 2024, the FCA extended the deadline for consumers to refer complaints to the FOS from 6 months to 15 months after receipt of a final response from a firm.
• Since January 2024, firms have been responding to information requests as part of the skilled person’s review.
• One of the FOS Final Decisions is subject to a challenge by way of judicial review. The judicial review hearing is likely to take place in the Autumn 2024. There was also a Court of Appeal hearing in July 2024 hearing appeals from certain motor finance court judgments. The Court of Appeal judgment is currently awaited.

FCA publications on 30 July 2024

On 30 July 2024, the FCA released:

1. An update announcement on its website: https://www.fca.org.uk/news/statements/update-motor-finance-work
2. The transcript of an “Inside FCA” podcast with Nikhil Rathi (FCA CEO) commenting on the motor finance market: https://www.fca.org.uk/publication/transcripts/inside-fca-podcast-transcript-motor-finance-interview.pdf
3. A consultation paper to extend the current pause to firms responding to DCA complaints: https://www.fca.org.uk/publication/consultation/cp24-15.pdf

FCA update

• In January 2024, the FCA introduced (without consultation) a pause to the usual 8-week deadline for firms to respond to DCA complaints until 25 September 2024.
• The FCA said at the time that they would set out next steps by 24 September 2024 and that they would consult in the event that an extension of the pause was needed.
• The FCA are reviewing DCA data from firms across a 14-year period (2007-2021).
• Some firms have struggled to provide data (e.g. issues with firms not keeping older data, data stored across multiple systems, data spread between lender/dealer).
• The FCA now has the necessary data but the delays in collecting this have affected the original September 2024 timetable.
• Also, there is likely to be a hearing in the FOS judicial review proceedings in Autumn 2024 and there is a pending decision of the Court of Appeal following a hearing regarding motor commission claims in July 2024.
• The FCA are consulting on extending the current pause on responding to DCA complaints to 4 December 2025 at the earliest.
• The pause will allow the FCA time to consider the court decisions above and to design and consult on a consumer redress scheme (if this is the chosen outcome). “It is too early to say if the FCA will intervene in this way but based on our work so far it is more likely than when we started our review”.
• The FCA intend to set out the findings of their review by the end of May 2025.
• The FCA are proposing to give consumers until the later of 29 July 2026 or 15 months from the date of their final response letter to refer a complaint to the FOS (instead of the usual 6 months).
• The deadline for commenting on the consultation is 28 August 2024.
• FCA will publish a policy statement by 24 September 2024.

Framework for next steps

• In the short term, the FCA will be focused on completing their analysis of market data and considering the outcome of the key court cases.
• The FCA will then consider possible interventions. This may include: (i) telling firms to resume handling complaints (in which case the FCA will consult on ending the current pause on complaint handling early); (ii) design new rules for dealing with complaints; or (iii) design a consumer redress scheme.
• If changing the rules for dealing with complaints or proposing a consumer redress scheme:
  • The FCA is likely to consult on this in May 2025.
  • The FCA is likely to then confirm final rules for how consumers will be compensated (December 2025).
  • From 2026, firms would start to follow the new approach.

Nikhil Rathi Podcast (key messages)

• The FCA needs to extend the pause due to delays in receiving information and ongoing court proceedings. The FCA has applied to be an “interested party” in the FOS judicial review proceedings.
• The FCA might decide to put in place a redress scheme (no decision made yet). A pause in complaints to December 2025 allows time for a redress scheme to be consulted upon and allows time for that to be put together.
• FCA has submitted its views to the court in the FOS judicial review proceedings regarding the interpretation of FCA rules and the Consumer Credit Act. The FCA has not given views on the FOS assessment of redress. “The FOS looks at individual cases and the circumstances of each specific case. We play a broader role and when deciding what if any action to take, we have to consider our objectives and that includes the impact on the market now and in the future whilst also our objectives to protect consumers and ensure competition”.
• The FCA has to ensure the motor finance market works well now and into the future. Nearly 80% of households in the UK own a car. Motor finance is not covered by the Financial Services Compensation Scheme. If a firm fails, the consumer will not have recourse to the FSCS.
• Firms who think they could have a redress liability coming up in the future need to make sure that they maintain the appropriate level of funds to prepare for that liability. The FCA has already written to firms on this.
• Whilst the FCA has not made any final decisions, it is more likely now (since commencing the skilled person’s review) that some kind of structured redress mechanism may be necessary. Another option is to allow firms to continue to process complaints in the normal way and that may be a route that the FCA chooses for some situations.
• The FCA don’t expect motor commission redress to be on the scale of PPI.
• The Consumer Duty is not relevant to the period the FCA is looking at (pre-2021). However, the Consumer Duty is relevant going forward in terms of how firms handle complaints.

Next steps

The FCA has been keen to stress that nothing has been decided yet as regards next steps and there remain various moving parts in terms of the FCA’s own review of data and pending court decisions. Options include the FCA telling firms to resume handling complaints or the FCA designing new rules for dealing with complaints. However, the FCA are clearly giving thought to the potential for implementing a consumer redress scheme (likely under section 404 FSMA 2000).

If the FCA were to proceed with a section 404 redress scheme, the requirements for this are broadly that (i) the FCA considers there has been a widespread or regular failure by relevant firms; (ii) as a result consumers have suffered loss in circumstances where if they brought legal proceedings a remedy or relief would be available; and (iii) the FCA considers it desirable to make rules for the purpose of securing redress. The process would require the FCA to pre-consult with FOS as well as the industry and consumer groups before a formal consultation is launched.

The details of any such redress scheme will be key, in particular, the methodology for calculating redress. The FCA appears to be laying the groundwork for departing from the FOS’s current redress methodology by emphasising that the FCA has to have regard to various wider factors (such as ensuring the motor finance market continues to work well with effective competition) and ensuring the motor finance market can sustain the overall redress programme (noting there is no FSCS protection for consumers if firms fail so it is also in their interests for the redress programme to be sustainable overall).

Any challenge to a section 404 redress scheme (by either lenders/dealers or claimants) would need to be made to the Upper Tribunal, generally on the same principles as judicial review.

If the FCA decides to propose a section 404 consumer redress scheme, the timeline is likely to be the following (subject to any legal challenge): FCA to consult on the proposed redress scheme by the end of May 2025; FCA to confirm redress scheme by the end of December 2025; redress scheme implementation from 2026 onwards.

For the time being, firms and claimants will likely need to wait until the end of May 2025 for confirmation as to which route the FCA is intending to go down.