The latest salvo from the Financial Conduct Authority regarding the legal challenges to the motor finance redress scheme has shown the scale of the issues facing the regulator.
Last Friday, the FCA said in slightly exasperated tones: “Our priorities remain to secure fair compensation for consumers as quickly as possible and ensure a healthy motor finance market.
Claims businesses simply look for flaws in the system, with motor finance being the latest, hot sector to go after
“Our industry-wide scheme is the quickest, fairest and most cost-effective way to do this.
“If the scheme, or parts of it, were quashed, we would need to carefully consider all options, taking account of all relevant matters. That would include whether to proceed with a revised scheme. This would likely require further consultation, and any resulting rules or guidance could face further lengthy challenge.”
The motor finance redress scheme was launched at the end of March to address poor practices in the motor finance market during the past two decades.
There are two schemes, one covering April 2007 to March 2014, and the other April 2014 to November 2024.
Industry pushback
The legal challenges come from three lenders — Mercedes-Benz Financial Services, Volkswagen Financial Services, Crédit Agricole Auto Finance — and consumer rights organisation Consumer Voice, which is represented by Courmacs Legal.
Volkswagen says: “We have identified issues that require independent clarification and we have therefore asked the Upper Tribunal to provide clarity. Our referral is focused on ensuring the redress scheme is applied accurately and fairly.”
Consumer Voice for its part says it is challenging the redress scheme on the grounds that it does not fully compensate everyone affected, and has favoured lenders more than consumers.
The FCA had clearly anticipated a legal challenge, mentioning it in the original policy statement.
However, the view among the legal profession is that the FCA wants the matter dealt with, and has set up what might be a sort of one-size-fits-all scheme, to prevent a run on the lenders and a bonus day for aggressive claims management companies and claimant law firms, akin to the occurrences with payment protection insurance payouts.
The situation relates back to the Supreme Court judgment last summer, which decided that the relationship between car dealers selling finance to consumers did not entail a “fiduciary duty” and therefore any commissions paid to them by the finance company did not amount to a bribe.
However, the supreme court justices, referring to an earlier Court of Appeal decision, did conclude that in the specific case of Marcus Johnson, who had bought a Suzuki Swift for £6,499, there had been an unfair relationship. This was for three reasons:
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The £1,650.95 commission paid by the lender to the dealer was too high.
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The failure to disclose the commission.
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The tied relationship between the dealer and the lender.
The relationship between the lender, FirstRand, and the dealer was considered to be particularly difficult, because the dealer had said it was choosing from a panel of lenders, when in fact it had the tie with FirstRand, which had first refusal on all loans.
Following that ruling the redress scheme was launched because of the potential of many other “unfair relationships”, under section 140A of the Consumer Credit Act, where commissions were not fully disclosed.
According to the ruling, reference to such commission, as cited in the Johnson case, can be limited to: “Commission may be payable by us [the lender] to the broker who introduced this transaction to us. The amount is available from the Broker on request.”
The scheme as announced by the FCA at the end of March, after consultation, allows for lenders to assess those who are due compensation because of loans they might have taken out, and the commissions they paid.
The terms of the scheme are that they must relate to loans taken out between April 6 2007 and November 1 2024. The lender should check if the arrangement involved a discretionary commission agreement, high commission or a tie between lender and dealer.
The firm can assess the liability, which for most people Is deemed to be calculated by the average estimated loss and commission paid, plus interest.
Redress will be capped at the lowest of:
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90 per cent of commission plus interest.
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The total cost of the credit with adjustments.
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The actual cost of the credit calculated on a simpler basis.
In total, the cost to the motor industry is expected to be £9.1bn, with the redress amounting to £7.5bn, assuming a 75 per cent participation rate. The average payout is expected to be £829
Nathan Willmott, partner at Ashurst, says the FCA is keen to get the scheme moving, so that the matter is dealt with, and does not drag on for years.
“Any scheme of this nature will involve compromises, and many take the view that an imperfect scheme is far preferable to no scheme at all.”
Even if the scheme has a few rough edges, he adds, many across the industry realise it would be cheaper to administer the compensation through such a scheme than if each complainant were left to pursue their individual cases through the courts or through the Financial Ombudsman Service.
Claims management headache for the FOS
The wider issue behind the motor finance redress scheme is the problems of claims management companies and law firms going after lenders in an effort to get compensation, now that the unfairness has been established in the courts.
Measures were put in place last year by the FOS, where many cases end up, which mean professional representatives now have to pay £260 for every case that gets referred to the FOS, falling to £80 if the FOS finds in favour of the consumer. They also have to submit an online form, giving a full outline of the complaint.
Motor finance has been a big problem for the FOS.
In 2024-25 it received 73,328 new claims relating to motor finance, according to its annual report; it had budgeted for 13,900. Claims for pensions and investments were 12,431. Of the total 305,918 new claims, almost 50 per cent were brought by “CMCs and other professional representatives”.
The effect of this is very real. A judgment last year allowed Vanquis Bank — which lends to people with adverse credit histories — to proceed with legal action against law firm TMS Legal, which denies any wrongdoing. The impact, cited by the bank, of CMCs or those acting like them was profound.
TMS files financial mis-selling claims, and in this case alleges that Vanquis provided unaffordable credit to its clients, violating various regulatory obligations. Vanquis contested this, saying it applies affordability checks to new customers, and applies low credit limits (£250-£1,200) with modest monthly payments.
As of August 31 2024, about 33,000 claims had been submitted during a period of two years, according to Vanquis. Its case is that the claims had minimal information about, for example, Vanquis’s affordability checks or financial hardship data.
Many of the claims were rejected by Vanquis, either being out of time or rejected on merit, and 15 per cent were referred to the FOS.
Of the 12,250 considered and resolved by FOS, 83.8 per cent were either rejected or withdrawn. Of the remaining 16.2 per cent, just over a third were partially or fully upheld by Vanquis, and just under two-thirds were upheld by the FOS.
The judgment from the Vanquis/TMS strikeout ruling last year says: “None of the distress claims has been upheld. As for the claims that were closed, this was because they were either duplicates or TMS failed to provide the basic financial information as requested by the FOS.” The claims relate to where things stood, as of August 31 2024, according to the same judgment.
Vanquis’s case was that the impact of such “irresponsible lending claims” has meant it has spent £2.8mn hiring additional temporary members of staff, wasted £930,000 of management time and paid £9mn in fees to the FOS, resulting in lost profits of £270,000.
In response, TMS Legal says that it “disputes Vanquis Bank’s allegations and is defending the claim in full.
“Those matters remain disputed allegations in live proceedings and have not yet been tested through disclosure, witness evidence, expert evidence, or trial.
“TMS’s position is that the case raises important issues about the handling of affordability and irresponsible lending complaints, and about the ability of consumers to obtain professional assistance when navigating what can be a complex complaints process.
“A number of complaints submitted by TMS were upheld either by Vanquis itself or by the Financial Ombudsman Service for irresponsible or unaffordable lending”.
Root causes of poor practice
For its part, the FCA is planning on conducting a review of the CMC sector. (The FCA regulates claims management companies while law firms are regulated by the Solicitors Regulation Authority)
Also last week, the FCA said, together with the SRA, that it would “look at the root causes of poor practices across the market, like aggressive marketing, misleading advertising and unfair exit fees.
“Other concerns include consumers being signed up without their consent — without clear, upfront explanations of the implications of signing up or ticking a box, for example on social media adverts — or by multiple representatives, potentially causing confusion and delaying compensation”.
According to other market practitioners, the behaviour of some CMCs can be so bad that a claims business will bully a firm into engaging with them by threatening them with a mass claims event.
Martin Ward, partner at Eversheds Sutherland, says the review “has been coming for some time given that CMCs have been regulated by the FCA since 2019. The motor finance redress scheme appears to have brought it all to a head because this is where we have seen particularly poor practices around advertising and customer sign-up.
“There are reported incidents where a consumer [may have] signed up to 10 or more different professional representative firms, and we could end up in a situation where redress payments are delayed because of this’.
The FCA has already announced enforcement action against another CMC, The Claims Protection Agency, at the start of this year, about its advertising and sales tactics in relation to potential motor finance claims.
And it is trying to convince consumers that they do not need to use a CMC to get redress.
Alison Walters, director of consumer finance at the FCA, said earlier this year: “Our scheme is free and people don’t have to use a CMC or law firm. If they do, it’s important that they can trust them.”
However, according to some the FCA is not entirely blameless, as the claims businesses simply look for flaws in the system, with motor finance being the latest, hot sector to go after.
Willmott says: “Where regulators have allowed the market to operate on the basis of a misunderstanding of the FCA’s rules over an extended period, that tends to indicate a double failure by the regulator — firstly in their own rules not being clear, and then in failing to spot that firms across the industry are not operating in a compliant way.
“In the field of motor finance commission disclosure, most firms reasonably believed for many years that their commission disclosure statements met the legal and regulatory standards, and the FCA does not appear to have expressed a different view.”
However, despite the aggressive tactics of many CMCs and claimant law firms, Ward says: “CMCs and claimant law firms have a role to play in terms of providing access to justice, but there’s a balance between acting for the consumer who genuinely needs help bringing a complaint and doing so in a compliant way without fuelling the issue further through potentially aggressive and misleading advertisements.”
Melanie Tringham is features editor of FTAdviser
