The FCA's motor finance redress scheme: who is covered?

The FCA has published what it hopes is a balanced proposal to give appropriate redress to customers who lost out when they were treated unfairly on taking out car finance. The proposals are, of course, heavily based on the Supreme Court's judgment published in August in the Johnson v FirstRand Bank case but also aim to be proportionate in their assessment of what unfair looks like and the levels of loss that should be compensated.

In this article, we unpick some of the key elements of the proposal.

What agreements are in scope?

The starting point is that any regulated credit agreement for motor finance where commission was payable by the lender to the broker will be covered, if it was taken out between 6 April 2007 (the date from which the FOS and the courts consider complaints) and 1 November 2024 (because the FCA says it knows firms moved to more transparent practice after the October 2024 Court of Appeal judgment). All these agreements must be assessed against the unfairness indicators we explain below. The FCA has calculated that, of all the agreements made since 2007, 14.2m of the estimated 32.5m agreements made (44%) will be considered unfair under the scheme parameters.

Any consumer who has already been compensated for complaints covered by the scheme will be excluded, as will those whose have referred their complaints to the FOS as these will be resolved through the FOS unless all parties agree to take them within the scheme.

The scheme will cover regulated credit agreements only, so will not cover consumer hire or leasing arrangements, and it will cover only borrowers who are "relevant recipients of credit" within the meaning of CONC.

What was "unfair"?

The Supreme Court did not hold that all commission arrangements were unfair. Indeed many people, not least the House of Lords Financial Regulation Committee, have expressed horror that the FCA thinks that nearly half of the agreements within scope of the scheme are likely to have been unfair.

In principle, any agreement will be unfair if there was inadequate disclosure in a case where any of the following "unfairness indicators" apply:

• There was a Discretionary Commission Agreement between the lender and the broker (the FCA believes there is no evidence that customers were told about the existence of DCAs)
• There was a "high commission". The FCA has considered what level of commission constitutes a "high commission", pointing out that the Johnson levels were clearly unacceptable outliers. It proposes that commission will be "high" if it was at least equal to 35% of the total cost of credit and 10% of the loan. It has chosen these figures as it considers this the point at which the size of the borrowing costs would have been likely to be a major consideration in the customer's decision-making, had they known of them at the time of taking out the loan)
• the broker had in place contractual arrangements with any lender that gave the lender exclusivity or a right of first refusal.

So the starting point will be for lenders to prove any agreement meeting one of these criteria was not unfair – which they could do, for example, by showing there was adequate disclosure, or that the customer had the level of sophistication that they would have been aware of the features even though they were not adequately disclosed. Or, for DCAs, that the broker had in fact selected the lowest interest rate so would not have made additional commission. However, the FCA thinks there will not be many cases like this, and notes that if there is no evidence about what was disclosed, lenders must assume disclosure was not adequate. And it's quite likely there will often not be evidence – part of the reason firms are concerned that the scheme will cover agreements dating as far back as 2007 is that early agreements will have been paid off years ago, and the normal record-keeping period long elapsed, so finding evidence may be impossible.

Also, as the various Courts discussed, disclosures saying that a commission "would", "may be" or even "is" payable would be unlikely to be enough.

How do customers get into the scheme?

The FCA is proposing a hybrid of an opt-in and an opt-out scheme. The consultation includes a flow chat showing what pre-scheme checks it would expect. There are a number of dependencies here, not least:

• If a consumer has made a complaint before the scheme start date and that complaint is already with the FOS, the FOS will handle it unless all parties agree it should come within the scheme
• Regardless of this, though, firms must identify all motor finance agreements which had commission arrangements in place during the April 2007-November 2024 period and then checks whether the agreement had at least one of the three "unfairness" indicators. If the agreement is excluded, the firm must tell the customer. Any agreement that is not excluded is within scope
• What follows next depends on:
  • Whether the customer has already complained to the firm
  • Whether the agreement in has an unfairness indicator, and
  • Whether the agreement is within scope of the scheme at all.
• Broadly, lenders must write to all customers, but the form of the letter and the timescales depend on these factors
  • A customer who has already complained before the scheme starts and whose agreement has at least one unfairness indicator will be sent an opt-out letter within three months of the start of the scheme, and, if the consumer does not opt-out within a month, the firm must make the redress assessment
  • A customer who has not complained and whose agreement has at least one unfairness indicator will be sent an opt-in letter within six months of the start of the scheme, and will have six months to respond
  • A customer who has already complained but whose agreement does not have any unfairness indicators will within that first three months get a letter explaining that no redresss is due. If the customer does not respond within a month, then send the redress determination letter within a further month
  • A customer who has not complained and whose agreement does not have any unfairness indicators will be sent an opt-in letter which warns them that no relevant arrangements have been identified – and will also have six months to opt in
  • A customer who has not been contacted can contact the firm within a year of the scheme start saying they want to be considered.
• Once a consumer has joined the scheme (whether through not opting-out or through opting-in), firms would have three months to assess whether redress is payable and then to calculate it. The would then send the redress determination to the consumer, who will have one month to object. If there is no objection, the lender must sent the final confirmation and pay the compensation within one month.

The FCA thinks it is important that lenders contact consumers who had agreements within the relevant timescales even if it is to tell them that their agreement is out of scope of the scheme. This is to allow the consumers to take their case to the FOS if they disagree with the lender's decision.

How will lenders calculate redress?

The FCA proposes that in principle consumers will receive compensation at the average of what the FCA's calculation method suggests they lost and the amount of commission paid.

In extreme cases like Mr Johnson's will there be a repayment of commission plus interest. The FCA is defining extreme cases – or "very high commission" as cases where there was a contractual tie between broker and lender plus commission of at least 50% of the total cost of credit and 22.5% of the loan.

The FCA is proposing a methodology based on its economic research of what should have been charged and gives as an example that a loan with an interest rate to the consumer of 10% should actually have been 8.3%. So this would be used in the non-DCA cases and the DCA cases that were not extreme.

Do customers need to do anything?

Customers don't actually need to do anything except respond to communications from lenders. But, because of the timescales the FCA is suggesting, those who have already complained before the scheme starts will be dealt with faster than those who have not.

Do the proposals apply only to lenders?

The FCA proposes that lenders will be responsible for delivering the scheme as it thinks this will mean redress is delivered more quickly. It does acknowledge that lenders may want contributions from brokers for the role brokers played in any unfairness and requires brokers to cooperate with the scheme. If someone else has assumed the lender's liabilities, then that person must comply with the scheme or ensure that the original lender does. So it will be the lender that will need to take the lead in planning and making clear to brokers what they need from them, and in contacting the customers. Brokers must respond to lender requests for information within one month.

The FCA is also requiring lenders to appoint a senior manager to provide it with an attestation setting out what the lender did to prepare for the scheme and what systems and controls it has in place to identify relevant customers and records and to plug information gaps.

Is there no alternative?

Clearly, this exercise is going to take a lot of time and resource and it must be done properly. The FCA has provided an option for lenders to make an offer to consumers at any time (even before they've carried out the first step in the redress process), which could either just move directly to offering the total amount of the commission plus compensatory interest, or, if that is not the basis for calculation, an amount that is at least the maximum redress that would be payable under the scheme. If the consumer accepts that offer within a month, the lender can move straight to the redress determination. If the consumer does not accept within the month, the lender must withdraw the offer and start the process from scratch (but a month later than it would otherwise have had to do so).

Does the FOS have a role?

There are still opportunities for the FOS to become involved. A customer who does not agree with a lender's determination can complain to the FOS – but the FOS must only consider the position under the scheme rules.

FCA clarifications

The FCA has tried to address a few FAQs, and will continue to do so as they arise. The current list includes guidance on:

• Where customers received 0% APR deals. The FCA says that if the agreement is within scope of the scheme, lenders will still have to do the analysis, but may be able to rebut the presumption of an unfair relationship in certain circumstances in which a 0% APR deal could be relevant – and that as a result it is very possible that a lender could conclude there was an unfair relationship because of inadequate disclosure, but that no redress is due
• How prescriptive will the FCA be about the letters firms will need to send to customers. The FCA has suggested the key content it wants to see, and says it will use experience from other schemes to tell firms how it wants them to deliver key messages. It's also alert to the risk of fraudsters posing as lenders and is looking at how it can minimise these risks
• If the borrower has died. The FCA expects lenders to take reasonable steps to communicate with their beneficiaries or representatives.

What happens next?

In the most immediate future, the FCA will confirm by 4 December whether it is going to extend the deadline for firms to respond to customer complaints – it has proposed extending to 31 July 2026. Otherwise, if it decides to introduce the scheme, it plans to publish the rules and for the scheme to start operating early next year. It's looking for comments on the main proposals by 18 November and on the complaints deadline extension by 4 November. Although the FCA has said on several occasions it wants views on whether it has calibrated the scheme correctly, and has been at pains also to say that it is not yet made the final decision on whether a redress scheme is the best option, it would be a significant U-turn not to proceed.

It is clear the FCA is expecting firms to be acting now to get as prepared as they can for the scheme, and this includes ensuring they have adequate financial resources to carry out the exercise and meet their redress liabilities that might result. The FCA will be wanting a "delivery forecast" from firms six weeks after the scheme takes effect and monthly reporting thereafter. So lenders and brokers alike should be using the period before the FCA makes the final decision on the scheme to plan and collect information – while of course remembering to respond to the consultation if they hold strong views on any of the proposals.