Motor finance compensation scheme set to fuel even more legal action

The City watchdog has revealed its long-awaited motor finance redress scheme, but despite the bill for lenders coming in lower than predicted the scandal is not going away any time soon, as further legal action is expected.

After a 2024 legal case ruled that car sales firms couldn’t lawfully receive commissions from finance firms unless they had the customers’ ‘full informed consent’, the lending industry faced the mother of all headaches.

The lenders, particularly Close Brothers, already faced the full force of the law, as the 2024 Court of Appeal decision was referred to the Supreme Court.

A year later, the UK’s highest court reversed the ruling on fiduciary duties, but upheld that undisclosed commissions can still create an ‘unfair relationship’.

After the ruling, the Financial Conduct Authority (FCA) announced it would proceed with a consultation on a redress scheme, which it unveiled on Monday evening after markets closed.

The FCA’s blueprint for its motor finance compensation scheme comes with a headline figure of £9.1bn, it represents a slight ‘win’ for the banking sector compared to earlier, more aggressive projections of £11bn.

However, the watchdog is moving forward with a two-tiered approach to address motor finance mis-selling, with deals going back to 2007 still set to be included, as it maintains its stance that lenders must be held accountable for deals dating back nearly two decades.

RBC analysts claim “it is highly likely” that at least one, and possibly several, of the many interested parties will ask the Administrative Courts to review this redress scheme.

A judicial review, which needs to be filed within three months, involves a judge reviewing the lawfulness of a decision, Act, or omission made by a public body, focusing on how the decision was made.

‘Do not go to a claims firm’

Danni Hewson, AJ Bell head of financial analysis, explained: “Under the scheme, eligible motorists should get compensation this year. However, there is still the potential that further legal action from either lenders or complainants could delay the process.”

Claimant law firm Courmacs Legal revealed last week it was planning to file a £66m omnibus claim on behalf of borrowers who believe they were financially harmed by car loan contracts set up by Lloyds’ motor finance arm, Black Horse.

Nicola Pangbourne, partner at Kennedys, said: “What will be interesting is the effect that this announcement has on the claimants seeking to bring an ‘omnibus’ claim against lenders in the civil courts.”

This comes as the FCA along with the legal regulator, the Solicitor Regulation Authority (SRA), have been critical of claimant law firms and claims management companies.

Shanika Amarasekara, chief executive of the Finance and Leasing Association (FLA), stated that any redress scheme must accurately identify and compensate only those customers who genuinely suffered loss.

“If it is drawn too broadly so that it also compensates customers who suffered no loss, the only real winners will be claimant law firms and claims management companies,” she added.

The FCA has urged people not to go to claim firms and instead go directly to the regulator. As part of its scheme, the watchdog has excluded anyone who is pursuing court action in the hope of securing a higher level of compensation from the redress scheme.

Richard Barnwell, a financial services advisory partner at BDO explained, there still remains a sizeable gap between the FCA and claims management companies over the amounts of customer due compensation.

“The final rules maintain average redress to be £829 per claim and a total redress bill for lenders of about £9bn. CMCs are claiming it should be almost double at £1,500 per claim.”