It’s been a while in the making, but the FCA has finally confirmed the form of the redress scheme that will compensate customers who were treated unfairly when taking out motor finance. At the time the FCA consulted on the scheme, it stressed that it might still decide a redress scheme wasn’t the way forward – although in reality it was very unlikely it would not proceed.
So, now we know there is one, but the FCA has made several changes following significant lobbying from industry, to come up with a scheme which it believes is both fair for consumers and proportionate for firms.
Let’s look at the key points.
Two schemes
One of the most controversial aspects of the proposals was that the FCA proposed to go back to 2007, on the basis that firms owe liabilities from that date. However, many respondents queried whether the FCA had the power to include agreements from before 1 April 2014 (the date on which it took over regulation of consumer credit). The FCA says it has, but has decided to implement two separate schemes, one for agreements entered into between 7 April 2007 and 31 March 2014, and the other for agreements entered into from 1 April 2014 to 1 November 2024. This means that if there is further challenge to the legality of Scheme 1, Scheme 2 will be unaffected.
Who can claim under the scheme?
Not as many consumers as would have been able to under the original proposals. The FCA says 12.1m agreements would now be eligible, rather than the 14.2m at the point of consultation. It says this is to reflect the fact that only consumers who were treated unfairly should be eligible, and this means that where there was minimal commission or zero APRs, consumers won’t be eligible. Nor is a contractual tie between a lender and a manufacturer or dealer of itself enough to be a trigger.
So, who is eligible? There are three categories of arrangement between lenders and brokers/dealers that customers should have been told about:
- Discretionary commission arrangements
- High commission arrangements (now with changed thresholds of at least 39% total cost of credit and 10% of the loan)
- Contractual ties that give the lender exclusivity or the right of first refusal – but this is now tempered so that if the lender can show there were visible links between it, the manufacturer and dealer (e.g. a white labelled arrangement with prominent branding on all documents) this will mean the arrangement is not in scope.
And there are further exclusions, again aimed at ensuring that only borrowers who truly lost out will be eligible for compensation. The following cases will not be scheme cases:
- Where the commission was £120 or less in Scheme 1, or £150 or less from 1 April 2014
- Where the borrower was not charged interest as customers would not have shopping around to get a lower APR where it had been offered a zero percent APR
- Where the DCA wasn’t actually used to earn discretionary commission
- Where the lender can prove it was fair not to disclose the arrangements, or where the customer did not suffer loss – for example if a tied arrangement did not actually operate in practice or where no better deal was available for the consumer
- Where the consumer has already successfully complained to the FOS, had their claim assessed by a court or accepted redress
- Where the loan was for “high value”, which the FCA defines as higher than 99.5% of other loans that year (on the basis that these aren’t suitable for a mass redress scheme, but the customer can still complain about them). For context, the FCA estimates this as covering loans for £82,000 or more if made in 2023 or 2024
- Where the agreement was cancelled or unwound during the cooling off period
- If firms choose, they can exclude cases involving high commission where the loan ended before 26 March 2020 but only if they can show that the fact commission was payable was clearly and prominently disclosed.
Customers whose complaints are pending with the FOS will have their complaint resolved by the FOS.
How will compensation be calculated?
The FCA has also made changes to how the amount customers should get back will be calculated – it says this is to reflect greater loss in the earlier years covered by the scheme and also to ensure customers won’t be put in a better position than they would have been had they been treated fairly, and this has meant the FCA is imposing a cap in around one third of cases. This means that the total compensation it estimates firms will pay is £7.5bn based on an estimated 75% uptake.
Johnson-aligned cases
For cases aligned with the Johnson case – that is, where there was an undisclosed contractual tie or DCA and very high commission of at least 50% total cost of credit and 22.5% of the loan, consumers will get all commission paid returned to them plus interest.
Other cases
For non-Johnson aligned cases compensation will be calculated on the basis of the average of the commission paid and the estimated loss, based on a percentage discount of the APR the consumer paid, plus interest. The FCA has also set different APR adjustments for Scheme 1 on the basis that it seems more harmful forms of DCA were around in the early years, and that differences between average DCA and non-DCA APRs were also larger, plus firms telling the FCA that availability of data for pre-2014 loans is limited. So there is average loss equivalent to an APR adjustment of 17% for Scheme 2 and 21% for Scheme 1.
There will also be a cap on compensation for these customers, so that they don’t end up in a better position than would have been the case had they been treated fairly, or than those who were treated the most unfairly. So there will be a cap of:
- 90% commission plus interest
- Total cost of credit, adjusted to account for a minimal cost offered to only 5% of the market at the relevant time (excluding 0% deals)
- Actual total cost of credit.
Interest
On all payments, interest will be the annual average Bank of England base rate plus 1%, but will never be less than 3% per year.
Effects
In terms of figures, the FCA thinks around 90,000 consumers align with Johnson, and 64,000 whose APR was in the lowest 5% offered (excluding 0% deals) won’t get any compensation.
The policy statement includes significant detail on the assumptions and metrics the FCA has used in setting the final figures.
What’s the timeline?
Implementation period: Firms have a short time to get their processes in place. They have only until 30 June 2026 for Scheme 2, and until 31 August for Scheme 1.
Contacting customers who have complained before the end of the implementation period: Lenders will have three months from the end of the relevant implementation period to tell consumers who have already complained whether they are owed compensation and if so, how much. The FCA has dropped its proposal for an additional stage which would have meant these customers would have had to receive a letter asking them whether they wanted to opt-out, which it now acknowledges would have confused customers and meant they had to wait longer for their redress determinations.
Contacting customers who have not complained: Where people haven’t complained, the FCA has now acknowledged that firms have to make contact only if they are potentially owed money or would have been covered but are timed out of the scheme – so it has dropped the strange suggestion to require firms to contact customers who have not complained just to tell them that they’re not owed redress. Where the lender contacts non-complainers, it must do so within 6 months of the end of the implementation period and customers then have 6 months to respond.
Provisional redress decision: Once a consumer receives a provisional redress decision, they have a month to accept or challenge it, and if they accept, the firm then has a further month to pay them the redress. If they challenge it, the firm must review evidence the consumer provides (and give reasonable time for the consumer to do this), and then send a redress determination that includes details of the right to refero to the FOS.
How to make payment: Firms must ask customers how they want to be paid, suggesting bank transfer, unless the customer provides reasonable alternative instructions. The customer must confirm payment method when they accept the offer.
Long stop date: Where people haven’t complained and aren’t contacted, they can still make a complaint up to 31 August 2027.
What does this mean? So, all customers who have complained and accept their offer of redress should therefore have their payments by the end of 2026. Only those who have not complained will not be paid until 2027. And of course, those who for various reasons are not eligible for the scheme or choose to challenge in court will be subject to different timelines and potential outcomes.
How will firms contact customers?
The FCA has decided to be more flexible than originally proposed, and let firms choose the best method of communication to meet the needs of consumers – but of course with fraud prevention safeguards, and subject to some communications needing to be sent in a “durable medium”. But the unpopular suggestion of recorded delivery letters has gone and the FCA has acknowledged that most people prefer to be contacted by e-mail. Also, the FCA will no longer prescribe template letters, but will require firms to provide customers with a standardised factsheet when they make initial contact with the customer.
If the customer doesn’t reply within a month of receiving a redress determination, and this was the first attempt at contact from the firm, then the firm needs to try again to contact the customer and must allow the customer six months to respond.
How will the FCA monitor compliance?
The FCA requires firms to update it regularly on progress, and will require an attestation from senior management about responsibility for overall oversight and delivery of the scheme.
It will require firms to notify it within two weeks of 30 March as to whether they intend to use the implementation period. If they actually intend to start work sooner, they must tell the FCA at least 15 days before they make a start. The next deadline is to provide the FCA with an implementation plan at week 6 with a delivery forecast, which includes among other details the name of the responsible senior manager and details of the number of agreements in the starting population and the forecast of how many will be dealt with each month.
All firms are subject to monthly reporting from the point at which they start processing cases.
Firms must also keep all appropriate records for five years.
What does this mean for the complaints pause?
The FCA had extended the pause on dealing with relevant complaints until 31 May. Now that it has made the final scheme rules, it has confirmed that, where the complaint solely relates to matters to which the scheme does not apply, the pause will end on 31 May and so firms will have up to eight weeks from 1 June (they must also take into account any of that eight-week period that had passed before the pause was introduced) to send a final response.
But where the scheme does apply and the complaint also includes non-scheme elements, firsm can still defer the final response on the non-scheme elements until they are ready to communicate the outcome of their assessment of what is due to the customer under the scheme.
This, however, is a very broad description of what the FCA has said. Firms will need to review the FCA’s policy statement very carefully to ensure they apply the right timescales to dealing with complaints involving various combinations of issues. Even the FCA acknowledges there may still be some confusion, but it feels that what it has decided is what will work best.
What happens if the original lender transferred the loan?
The FCA has decided, broadly, that:
- If the original lender is still solvent, it is responsible for administering the scheme, but where the purchaser becomes liable as a creditor in relation to an unfair relationship that person will be responsible for paying a portion of the redress
- If the original lender is insolvent or no longer in existence, but another person obtained rights under the agreement, that other person will be responsible for the administration
- If the original lender is insolvent and there was no debt purchaser, then the administrator will have to administer the scheme unless it seeks directions from the court not to do so.
What will people think?
The FCA has noted that by making changes to the operation of the scheme, it is saving firms money on implementation, which it says will particularly help sub-prime and smaller lenders. And by making changes to the thresholds and exclusions, it has taken some consumers who would otherwise have been eligible for redress outside the need, and it has introduced the cap. So, while of course it can’t know for a fact how many consumers who are eligible will take up the offer of having their redress assessed, it thinks there will be a lower overall figure payable.
Statistically, it has reduced the amount of eligible agreements and the non-redress costs and therefore the likely final overall cost, but now assesses the average redress per agreement will be £829.
It seems that the FCA has carefully considered many of the points raised particularly by industry, and its lengthy policy statement explains why it has, or has not, made amendments to the scheme in response. And, while it acknowledges there is still a possibility of legal challenge to Scheme 1, firms need to act quickly to meet the FCA’s deadlines.
What to do now?
Lenders will have been preparing for this outcome for months, and now is the time to take definitive action, both to ensure that the firm complies with the FCA’s reporting requirements and that it can deliver the redress programme within the relevant scheme timeframes.
No doubt both industry and consumer associations will continue to raise queries. The Finance and Leasing Association, responding to the FCA policy statement, said that the FCA had clearly tried to make the scheme more proportionate than what it had originally proposed, but that it will take time to assess the market impact.