Complexity could delay payouts in car finance compensation scheme

Yahoo

2 days ago

Car buyers and banks are bracing themselves for the outcome of a review into a multi-billion-pound scheme designed to compensate borrowers who paid too much commission for car loans.
However, critics say the scheme may be overly broad and complex, potentially delaying claim resolutions for years.
It follows a year-long battle between lenders, legislators and even the government over three cases centred around salespeople being incentivised to charge higher interest rates – without the knowledge of buyers – so they could bank an increased commission.
This ended at the start of this month with a landmark ruling at the Supreme Court. Lord Robert Reed ruled that in two of the cases such arrangements – known as discretionary commission arrangements (DCA) – were legal, but he judged that in the the third, known as the Johnson case, the value of the commission (over half the sale price) and how it was disclosed pointed to an unfair relationship between banks and car dealers, making it illegal under the Consumer Credit Act.
In the wake of the judgements, finance watchdog the FCA announced it will consult the finance industry on a scheme to compensate car buyers who paid excessive commission charges on car loans going back as far as 2007.
The pot for those affected is set to be between £9bn and £18bn. While incredibly high, it is more than half the forecasted £44bn and leaves lenders – especially the likes of Black Horse – celebrating the rulings.
During the review, which is set to be published in October, the FCA says it will examine how lenders should assess claims and what compensation may be due.
There are concerns, however, that the process risks being held up by the complex natures of the cases as well as contradictory views held by the FCA and the courts.
For example, the FCA deemed it was the nondisclosure of particular features within lending agreements, rather than the features themselves, that were deemed unfair, while the Supreme Court ruled that nondisclosure or partial disclosure of a commission paid by a finance company to a dealer was not.
Faced with these partially opposing statements, the FCA's task will be to weigh up a range of factors and decide what it considers to be unfair. These will include the 'characteristics' of the consumer – a term it has yet to define but which relates to the Court's comment regarding their 'sophistication' – whether the loan complied with regulatory rules and the extent and manner of a commission's disclosure.
The Johnson case, in which it was found the value of the commission relative to the loan was unfair, means this factor, too, will be considered, as will the nature of the commission.
Alongside this, a major part of the FCA's review will be deciding what is an unfair commission payment, where that payment was not disclosed to the consumer, such as, for example, the 55% in the Johnson case.
The FCA says in calculating compensation it will be informed by the degree of harm a customer suffered while considering the need to ensure that affordable loans for vehicles can continue to be offered. The Supreme Court decided the appropriate remedy in the Johnson case was the repayment of the commission. The FCA says it will consider this option alongside alternative remedies, but these are unlikely to exceed the full repayment of commission and could actually lead to lower payments.
The FCA estimates most claimants will receive less than £950 in compensation per finance agreement to which interest of around 3% (per year) will be added.
Following the ruling, the values of the major banks soared as the City realised the size of the compensation bill they faced had more than halved in size. This alone should tell car buyers who apply for redress that their chances of achieving it are much reduced.
Added to this are the challenges facing the FCA's scheme, including the near-impossibility of lenders being able to produce documents relating to older finance agreements, many completed back in 2007.
Philip Salter, former FCA director of retail lending, said: 'The FCA's statement is broad and complex. The Supreme Court provided legal clarity, but the challenge for firms now will be preparing for an immense operational and financial task.
'The FCA's approach requires firms to analyse their whole historical loan book against a complex matrix of 'unfairness'.'
Others criticised the problems of establishing consumer loss. John Phillipou, chairman of the Finance and Leasing Association, said: 'The outline of the redress scheme is impractical. I understand the 'doing right' by the consumer, but one of the things is showing loss to consumers. That's going to be hard to prove.'
In its defence, FCA chief executive Nikhil Rathi said: '[The] judgement helps us because we have been looking at what is unfair. Prior to this judgment, there were different interpretations of the law coming from different courts. It is clear that some firms have broken the law and our rules. It's fair for their customers to be compensated.'
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