Britain’s financial regulator, the Financial Conduct Authority (FCA), has issued a strong warning that compensation payments arising from the motor finance commission scandal must not lead to company bankruptcies or damage the car finance market.
This caution comes ahead of a crucial Supreme Court ruling expected next month, which could hold lenders responsible for up to £44 billion in redress claims.
The Supreme Court will review a previous decision that deemed certain discretionary commission payments unlawful. If upheld, this ruling could trigger compensation on a scale comparable to the infamous Payment Protection Insurance (PPI) scandal.
The FCA emphasized that any redress scheme must protect the motor finance market’s integrity to ensure it remains competitive and affordable for future consumers.
Car finance firms face significant financial exposure due to discretionary commission arrangements (DCAs), which allowed dealers and brokers to set interest rates that often led to higher loan costs for consumers.
Some major banks have already set aside large sums for potential payouts: Barclays £90 million, Santander £295 million, and Lloyds Banking Group £1.2 billion. Moody’s estimates the total industry liability could reach £30 billion, while the FCA warns it might be as high as £44 billion.
The FCA criticized speculative compensation figures promoted by some claims management companies and law firms. It warned that if many firms exit the market or fail, competition would shrink, potentially making car loans more expensive.
Moreover, customers of failed firms may lose out on compensation because motor finance is not covered by the Financial Services Compensation Scheme.
The controversy began when a Court of Appeal ruling in October declared it unlawful for lenders to pay commissions to car sellers without customers’ informed consent. This led to a surge in complaints from consumers who said they were not properly informed about DCAs before their ban in January 2021.
The Supreme Court heard an appeal in April and is expected to deliver its final judgment this summer. Following the verdict, the FCA plans to consult on a redress scheme, including whether it should be opt-in or opt-out for consumers.
Darren Richards, head of insurance and regulatory advisory at Broadstone, noted that designing a fair redress scheme is complex and must balance consumer fairness with market stability.
The FCA’s firm stance aims to avoid repeating the market disruption caused by the PPI scandal while ensuring consumers receive fair compensation for past wrongs in car finance.
