The proposed scheme covers claims in relation to arrangements which involve discretionary commissions, commissions said to be too high, and where there are commercial ties between the lender and the dealer, in each case that were not adequately disclosed, so giving rise to “unfair relationships” under the Consumer Credit Act 1974.
What arrangements are in scope?
Those between 2007–2024
The scheme would cover commission arrangements in relation to regulated motor finance agreements entered into with consumers between April 6, 2007 and November 1, 2024.
Those presumed to be unfair
If the arrangement meets one or more of the following criteria it would be presumed to be unfair:
- It is a discretionary commission arrangement.
- There is a high commission (i.e. greater than or equal to 35% of the total cost of credit and 10% of the loan).
- There are contractual ties that give a lender exclusivity or a right of first refusal.
Outside of this, consumers would have the right to test their case with the Financial Ombudsman Service but would only get a different outcome if it decides the scheme rules were not followed. They could also start litigation proceedings.
Subject to rebuttable presumptions
The FCA liability assessment proposes two presumptions in favour of consumers, which lenders can rebut. The first is that an unfair relationship arose from inadequate disclosure of a relevant arrangement, and the second is that this unfair relationship caused loss or damage to the consumer.
If the relationship was not, in fact, unfair
Lenders would be entitled to determine there is, in fact, no unfair relationship under the scheme in any of the following instances:
- There is evidence of sufficient disclosure of the relevant arrangement in question.
- In the case of discretionary commission arrangements, the lender can provide evidence that the dealer chose the lowest interest rate at which they would not have made any additional commission.
- Disclosure of the relevant arrangement in question was insufficient, but the lender can provide evidence that the consumer was sufficiently sophisticated to have nonetheless been aware of the essential elements of the commission.
The FCA says that, for discretionary commissions, adequate disclosure would require lenders to disclose not just the fact that a commission is paid, but also the nature of the arrangement. Specifically, this would include explaining how the dealer’s commission was linked to the interest rate charged and that the dealer had discretion to select the rate within a range set by the lender.
In the FCA’s opinion, it would be rare for a customer to have the background or experience that would mean they were sophisticated enough to be aware of information that ought to have been disclosed. It seems that in practice, therefore, the second scenario above is likely to be the only one that can be used to rebut the presumption of unfairness for a discretionary commission arrangement.
Where you are dealing with a high commission arrangement, adequate disclosure would require lenders to disclose both the fact and the amount of the commission, or information that would have enabled the consumer easily to work out the amount (e.g. what the commission would be as a percentage of the loan amount).
That there was, in fact, no loss or damage caused by an unfair relationship
The FCA propose that the presumption of loss or damage caused by an unfair relationship arising from inadequate disclosure of a high commission arrangement or a tied arrangement should be rebuttable if the lender can provide clear, contemporaneous, and customer-specific evidence that the consumer would not have secured a lower interest rate from any other lender the dealer had arrangements with at the time of the transaction.
What is the level of redress?
The remedy ordered by the UK Supreme Court, in relation to the unfair relationship to which Mr Johnson was subject, was the return of the commission. The FCA identified two further alternative approaches to compensation:
- An “APR adjustment remedy”, that seeks to determine the interest the customer “should” have paid by comparing the actual interest rate a consumer paid with the rate they could have got from dealers and lenders where there was no conflict of interest. The FCA estimates that, on average, borrowing costs on loans with a flat fee commission structure were 17% lower than comparable loans with discretionary commission arrangements.
- A “hybrid remedy” of the average of the compensation payable for return of the commission and the APR adjustment remedy.
In most cases, it is anticipated that the hybrid remedy would apply.
Where there is both a very high commission (i.e. greater than 50% of the total cost of credit and 22.5% of the loan) and a commercial tie, as was the case for Mr Johnson, the FCA accepts that returning the commission is the appropriate remedy unless applying the APR adjustment remedy the consumer would be better compensated.
The FCA propose that simple, not compound, interest be paid on the compensation, based on the annual average Bank of England base rate per year plus 1% from the date of overpayment to the date compensation is paid.
Opt in or opt out?
Lenders will be expected to contact consumers, who have complained before the scheme starts, within three months. They will be included in the scheme unless they opt out. Consumers who have not complained when the scheme starts would be contacted within six months, where lenders can identify them, and asked whether they would like to opt in. Any consumers who have not been contacted can ask the lender to review their case at any time within one year of the start of the scheme. The FCA will run an advertising campaign to raise awareness of the scheme.
The numbers
The FCA estimates around 85% of eligible consumers would take part in the scheme, which would mean estimated redress of GBP8.2 billion (including interest). This estimate is based on participation rates in past redress schemes and FCA consumer research which shows 14% of past and current motor finance holders do not intend to make a claim.
The FCA estimate that this would result in consumers being compensated an average of around GBP700 per agreement.
Inevitably, given the scale and complexity of such a scheme and limitations in the data the FCA have spanning such a long time period, the estimates remain highly indicative and susceptible to change.
Comment
The FCA’s proposed scheme represents an attempt to remedy what the Supreme Court identified, at least on the facts before it, as “unfair relationships”, alongside the discretionary commission arrangements the FCA was already looking into.
Different sectors will have different takes and are being encouraged to share their thoughts by responding to the consultation. The claims management firms may feel that the scheme interferes with their business model and that, if they had not started litigation, these consumers would not have been compensated in the first place. The lenders may be concerned about their exposure (although this is a long way from the shock of last autumn’s Court of Appeal decision) and that consumers are being over-compensated by the adoption of the hybrid approach.
It remains to be seen how these competing views will influence the final scheme once the consultation has been completed.
