The Financial Conduct Authority (FCA) has announced that it expects lenders to make 14 million payouts to individuals affected by unfair motor finance agreements, totalling around £11bn in compensation.
The FCA estimates people would receive around £700 per agreement, on average.
It has also been calculated that around 85 per cent of eligible consumers would participate in the scheme, which would result in an estimated redress of £8.2bn (including interest).
This estimate of 85 per cent is based on participation rates in past redress schemes and the FCA’s consumer research, which showed 14 per cent of past and current motor finance holders do not intend to make a claim.
However, if there is a 100 per cent take-up, firms would owe up to £9.7bn in redress. And if there is an 85 per cent take-up of the scheme, the estimated costs to firms of implementing and operationalising the scheme would be £11bn.
Nikhil Rathi, chief executive of the FCA, said: “Many motor finance lenders did not comply with the law or the rules. Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.”
“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated. On such a complex issue, not everyone will get everything they would like.”
“But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year,” he added.
The scheme is covering motor finance agreements entered into between 6 April 2007 and 1 November 2024, where commission was payable by the lender to the broker.
How we got here
The City watchdog confirmed, within days of the Supreme Court’s ruling on the motor finance legal battle, that it would consult on an industry-wide redress scheme.
The regulator had initially expected the total cost of the scheme to be between £9bn and £18bn, falling far short of the £44bn previously feared by the industry.
Lenders across the City breathed a sigh of relief after the landmark Supreme Court ruling in August, which upheld the appeals of Close Brothers and FirstRand Bank.
When announcing the consultation, the FCA stated that there would be “tensions” between its mission to balance fairness, timeliness, and transparency, all while keeping the market afloat.
Agreements going back to 2007 would be eligible as part of the scheme, the regulator said, in a move that sparked fierce backlash across the City.
Stephen Haddrill, director general of the Finance & Leasing Association (FLA), had branded the time frame a “major concern”.
Though, the FLA’s director of motor finance, Adrian Dally, did soften his outlook on the time, telling MFS UK: “If we can work together to find a fair and achievable way to deal with instances where there is a lack of data to support claims, then the 2007 timeframe would allow for all commissions complaints to be channelled through this redress scheme, no splintering-off of some old complaints to the Financial Ombudsman or the courts.”
Dally has struck out at the ballpark cost of the scheme, telling the Financial Times, the FLA believed it could be under £9bn.
Since the Court of Appeal’s October ruling, which was mostly overturned by the Supreme Court, several prominent names have withdrawn from the car finance market.
Santander announced it was spinning off its motor finance division earlier this year. Meanwhile, specialist lender Secure Trust Bank said it would phase out its loan book.
Last week, embattled lender Close Brothers announced a fresh £33m provision for motor finance related to “historical deficiencies”.
Lloyds has reserved a total £1.2bn for the saga, whilst Santander is on the hook for £295m.
Automakers have also been forced to set aside funds, with BMW allocating £200m and Ford £61m