Lords Critique FCA Over Confusion in Motor Finance Redress Scheme

A committee of lawmakers in the United Kingdom has criticized the Financial Conduct Authority (FCA) for a “deep lack of clarity” regarding its motor finance redress scheme. During an evidence session, Lord Forsyth, chair of the House of Lords Financial Services Regulation Committee, expressed concerns that the FCA had complicated and increased the costs associated with the redress process following a ruling by the Supreme Court on car finance.

The redress scheme has drawn criticism for its extensive lookback period, which dates back to 2007. Lord Forsyth described the 18-year timeframe as an “unreasonable and disproportionate burden on lenders.” In defense, Nikhil Rathi, chief executive of the FCA, stated that many firms had violated the law and justified the 2007 mark as being consistent with the relevant statute of limitations.

Rathi asserted, “We believe the scheme is going to be the most orderly and efficient way of addressing those liabilities and bringing this to an orderly and efficient close.” Since the FCA initiated its crackdown on motor finance in 2017, it has conducted reviews to evaluate the sales processes used by firms and assess potential consumer harm.

FCA Under Fire from Motor Finance Lenders

Criticism from lawmakers follows increased provisions by motor finance lenders in response to the FCA’s actions. Lloyds Banking Group recently added an additional £800 million to its motor finance reserves, bringing its total to £2 billion. Similarly, Close Brothers nearly doubled its provisions to £300 million. Both institutions have publicly criticized the FCA’s redress methodology, claiming it fails to achieve a proportionate outcome.

The lenders argue that the FCA’s assessment of “unfairness” does not align with the Supreme Court’s ruling in August 2023, which found that a commission of 55 percent charged to one of three claimants was “unfair.” The FCA has indicated that its threshold for redress will be set at 35 percent, impacting an estimated 14.2 million agreements.

A spokesperson for the FCA emphasized that many motor lenders “did not comply with the law or rules” and stated it is “time their customers get fair compensation.” They acknowledged that not all customers would receive what they desire but underscored the importance of resolving the issue to maintain a trusted motor finance market, which serves millions of families annually.

As the debate continues, the FCA faces pressure to clarify its redress scheme and address the concerns raised by both lawmakers and lenders. The outcome of this discussion may shape the future of motor finance regulation in the UK, impacting numerous stakeholders across the industry.