City watchdog plots streamlined motor finance scheme after backlash
The UK’s financial watchdog is looking to “streamline” its long-anticipated motor finance compensation scheme following widespread backlash across the industry.
The Financial Conduct Authority (FCA) provided a fresh update to markets on Wednesday, stating it was considering over 1,000 responses to its proposals for the industry-wide redress scheme.
It added “if” it was to proceed with a scheme, the regulator was “likely to make several changes”.
In its update on Wednesday, the FCA said it would streamline the process for consumers and firms through removing the opt out options and replacing it with a three month deadline for lenders to tell consumers what they are owed and how much.
Consumers receiving an offer would also be able to accept it immediately, as opposed to waiting for the final determination.
Firms would also be no longer required to write to customers via recorded delivery, which the regulator said would open fresh avenues of communication to best meet a consumers’ needs.
The FCA said: “If we do go ahead [with the scheme], we expect to publish final rules in late March.”
Britain’s top banks were thought to have been granted some reprieve earlier this year after the Supreme Court sided with upheld two out of three appeals from lenders in the landmark car finance scandal.
But the second half of the year brought a series of sharp turns in the saga, with the FCA unveiling plans for a contentious redress scheme that led to banks dramatically hiking their provisions for payouts.
“The FCA says it will be making operational changes to the scheme, but reading between the lines it seems unlikely that the FCA will be willing to make material changes to the substance of the scheme that would reduce its scope and cost for lenders,” said Tom Dane, a financial services Partner at law firm CMS.
“Given concerns with the legality of the scheme in its originally proposed form, there remains the prospect of further legal challenge to the rules once they are published.”
Banks and consumers plead their motor finance case
One of the key area’s of criticism for the FCA’s scheme rests on the assessment of “unfair” – the criteria the Supreme Court upheld in the one successful claimant’s case.
The top Court ruled in favour of one of three claimants after finding their outsize commission of 55 per cent was “unfair”.
However, the FCA has said the threshold for its redress – where 14.2m agreements are estimated to be eligible – will be 35 per cent.
The scheme as it stands hands lenders a bill of around £11bn – still a hefty sum but far below previous estimates of £44bn once feared by the City. Around 14.2m agreements will be eligible for the scheme, dating back to 2007 – a timeframe which has faced fierce opposition from the industry.
The watchdog was forced to push back the deadline for submitting feedback for motor finance redress scheme last year as backlash from the both consumer and lending sides mounted.
Lloyds Banking Group – which owns the UK’s largest car finance provider Black Horse – was forced to hike provisions to £2bn from £1.2bn after details of the scheme emerged in October.
While FTSE 250 lender Close Brothers near-doubled its funds set aside to £300m and Barclays almost quadrupled its provisions to £325m.
Santander UK pulled the plug on its third-quarter results in October, citing uncertainty in the motor finance sector, as bank chief Mike Regnier called for the government to consider stepping in to help mediate.
He warned if the government does not intervene “the unintended consequences for the car finance market, the supply of credit and the resulting negative impact on the automotive industry and its supply chain could significantly impact jobs, growth and the broader UK economy.”
There has also been equal backlash on the consumer front, with the All-Party Parliamentary Group (APPG) on Fair Banking blasting the City watchdog for a “£4.4bn gap” in the proposed scheme.
The group accused the regulator of being “influenced by the profit margins of the lenders”.