The Financial Conduct Authority has softened the motor finance blow for lenders but experts say firms won’t be able to shift into a new gear just yet.
The City watchdog has priced the cost of its industry-wide redress scheme at £11bn – a hefty sum but far below the eye-watering £44bn previously floated.
Just over 14m agreements from between 2007 and 2024 will be eligible for compensation with around 4m expected to already be in place. On average, claimants will receive £700 per agreement the FCA said.
The watchdog put the focus of the new scheme on maintaining market integrity – a key message it has repeated since July.
Sushil Kuner, partner and head of financial services regulation at Freeths, said: “The FCA is clearly mindful of the lessons from the PPI redress programme, where overcompensation became a systemic concern.”
Kuner added a focus on fairness, cost-effectiveness, and proportionality indicates the regulator sought to balance consumer protection whilst keeping the market intact.
The regulator has put lenders in the driving seat of the scheme, meaning overall costs could be relative to approach with administrative tasks.
Christos Doumas, director at Forvis Mazars, said the “lender-led scheme” would mean firms require a senior manager to confirm the FCA’s process has been followed correctly.
“The regulator has said it will take strong action if that assurance cannot be provided,” Doumas said.
The FCA has suggested that firms may need to work with third parties to reconstruct records, which Kuner said signals a “forensic approach to enforcement”.
Doumas added: “In short, this is more than a redress exercise. It is a test of data discipline, accountability and governance across the motor finance sector, and one which provides many lessons for firms to prevent similar issues in the future”
‘Overprovisioned’ banks get a breather
Banking stocks jumped during early trading on Wednesday as markets breathed a sign of relief at the news.
Benjamin Toms and Pablo de la Torre Cuevas, analysts at the Royal Bank of Canada, said updated forecasts suggest “banks have over provisioned”.
Lloyds have led the pack on provisions with £1.2bn set aside, shortly followed by Santander at £295m.
Toms and Cuevas projected Lloyds would only require £850m, freeing up nearly £400m in capital.
Santander and Close Brothers were estimated to be narrowly on the mark, with only modest bumps to provisions required.
The analysts said the consultation paper was a “deep dive on what constitutes ‘unfairness’ in a motor finance arrangement”.
Johnson – the sole claimant who the Supreme Court sided with in August – was awarded compensation due to “unfairness”.
Whilst the latest update has answered many of the industry’s burning questions, Toms and Cuevas warned there was still “some risk” that the definition of “unfair gets challenged in the administrative courts” – a signal another legal battle could be on the horizon.