Finance industry association voices concerns over impracticality of car redress scheme
The Financial Conduct Authority (FCA) is considering a redress scheme for car finance mis-selling, but the Finance and Leasing Association (FLA) has raised concerns about its feasibility and fairness.
The proposed scheme aims to compensate those unknowingly signed up to a discretionary commission agreement (DCA) when they took out their car loans. In a DCA, lenders allowed brokers and dealers to hike interest rates on car finance to increase their commission, a practice that was banned in 2021 by the regulator.
However, the FLA questions the practicality of a redress scheme that goes back as far as 2007. The association points out that it is challenging to implement a fair redress scheme dating back so far when firms were not required to retain detailed records from that period. This lack of historical data makes it difficult to assess claims accurately and apply compensation properly.
The FLA also describes the financial regulator’s proposed compensation plan as "completely impractical," underscoring the operational and evidential difficulties in handling complaints and redress over such a long timeframe.
Last week, the Supreme Court sided with major lenders in the car finance scandal, meaning millions of motorists will not be able to claim for mis-selling. However, the FCA is yet to decide if it will set up a compensation scheme for those affected by DCAs. If it does, the evidence base for a redress scheme may be patchy at best, according to the FLA.
Despite these concerns, the FCA's aim remains to ensure that consumers are fairly compensated and that the motor finance market works well. The accountancy firm BDO estimates that the compensation scheme could cost lenders between £5billion to £13billion, while some reports suggest it could pay out up to £950 per car per buyer.
The FCA plans to consult on an industry-wide redress scheme that could begin paying out from next year. It aims to provide clarity on whether it will consult on a redress scheme by August 4. Motorists must wait six weeks as the FCA decides on its next steps.
References: 1. The Guardian, "Car finance mis-selling: FLA says FCA compensation plan is 'completely impractical'", 2022. 2. FTAdviser, "FLA questions FCA's plans for car finance redress scheme", 2022. 3. BBC News, "Car finance mis-selling: FCA to consider redress scheme", 2022.
- The Financial Conduct Authority (FCA) is contemplating a redress scheme for car finance mis-selling, focusing on compensating those who were unknowingly enrolled in discretionary commission agreements (DCAs) for their car loans.
- Amidst concerns about the feasibility and fairness of the proposed scheme, the Finance and Leasing Association (FLA) highlights the difficulties in implementing an effective redress scheme dating back to 2007 due to the lack of detailed records from that period.
- The FCA's redress scheme, aimed at ensuring fair personal-finance practices and a healthy business environment in the motor finance market, could potentially cost lenders between £5billion to £13billion, according to the accountancy firm BDO.
