4 days ago
Rathi hits back at claims FCA redress plan is unworkable
FCA chief executive Nikhil Rathi has pushed back against claims from the motor finance industry that the regulator's proposed redress scheme for discretionary commissions is too difficult to implement, saying lenders must stop 'haggling' and focus on delivering fair outcomes for consumers.
Speaking to the Financial Times, Rathi directly addressed industry complaints that the Financial Conduct Authority's plans to compensate customers for car loans dating back as far as 2007 were 'completely impractical' due to patchy record-keeping.
'Now is not the time to haggle with us, but to help put things right for consumers,' he said. 'We know it is difficult. But you can't say the law has been broken and it is too difficult to even try to put things right.'
His comments follow the FCA's announcement of a six-week consultation on an industry-wide compensation scheme, which could result in payouts totalling between £9 billion and £18 billion. The scheme is intended to address cases where customers were unfairly charged higher interest rates due to discretionary commission arrangements (DCAs) — a practice banned by the FCA in 2021 but widely used prior to that.
The proposal has prompted concern within the motor finance sector, particularly around how firms will access loan and commission records from as far back as 2007.
Stephen Haddrill, director general of the Finance & Leasing Association (FLA), warned earlier in a statement: 'We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007, when firms have not been required to hold such dated information, and the evidence base will be patchy at best.'
Legal risk contained, operational risk rises
The FCA's move comes on the heels of a Supreme Court judgment on three test cases — Johnson v FirstRand Bank, Wrench v FirstRand Bank, and Hopcraft v Close Brothers. The ruling narrowed the legal basis for many claims by confirming that car dealers did not owe fiduciary duties to customers. However, it upheld findings of unfair treatment in cases where commission payments significantly inflated interest charges and were poorly disclosed.
The judgment gave the motor finance sector some legal relief, as it removed the risk of a broader wave of litigation. Shares in lenders such as Lloyds, Close Brothers, and Bank of Ireland rose following the ruling. But the court's backing for the FCA's interpretation of 'unfair relationships' has left the door open to regulatory-led redress, which Rathi is now urging firms to support.
'If industry works with us, then we can get this moving quickly,' Rathi said. 'If, however, people want to continue to litigate this and have cases going through the courts for many, many more years, then of course it is going to take longer.'
Redress path unclear and costly
The FCA has yet to decide whether the redress scheme will be 'opt-in' — requiring customers to apply for compensation — or 'opt-out,' in which lenders proactively repay customers unless they decline.
'An opt-out scheme might take longer because firms have to go and look for all the addresses and track down customers who may have moved,' Rathi said. 'An opt-in scheme may be quicker, but will be less comprehensive.'
The regulator estimates most compensation payouts will be under £950 per agreement, but the overall burden for banks and car finance providers could be significant. Fitch Ratings has estimated that lenders may be on the hook for £5 billion to £11 billion, depending on the final scope of the scheme. The remainder would likely fall to non-bank and captive auto finance firms.
"Rathi hits back at claims FCA redress plan is unworkable" was originally created and published by Motor Finance Online, a GlobalData owned brand.
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