Stay informed with free updates
Simply sign up to the UK financial regulation myFT Digest — delivered directly to your inbox.
The UK financial watchdog is overestimating the £9bn-18bn in compensation it forecasts consumers will receive for mis-sold car finance, according to the motor finance industry.
Adrian Dally, director of motor finance at the Financing and Leasing Association, said the Financial Conduct Authority would struggle to prove the true losses suffered by consumers were as large as it initially estimated in August.
“We still don’t know what was behind the [FCA’s] suggestion,” said Dally. “They haven’t shown the workings . . . We think it should be less than £9bn.”
The FCA is set to publish a consultation paper as early as this week, outlining details of what is expected to be its biggest ever redress scheme for consumers who were mis-sold motor finance over the past two decades.
The FCA said: “We’ve engaged widely as we considered how any compensation scheme should work. We’ll consult on it shortly and set out the evidence we’ve gathered and our analysis.”
The watchdog has estimated the redress scheme will cost £9bn to £18bn for the 38 lenders it believes mis-sold as many as 14mn finance agreements on vehicle purchases between 2007 and 2021.
Many of the cases covered by the redress scheme will stem from discretionary commission agreements (DCAs) in which lenders allowed car dealerships to earn a bigger fee by pushing up the interest paid by a consumer on a loan.
Dally said that when the FCA banned DCAs in 2021, it estimated they had cost consumers £165mn a year. Even after adding interest at an expected rate of 3 per cent and administrative costs, the total would still be well below £9bn, he said.
The Financial Ombudsman Service has awarded compensation in DCA cases equal to the amount of extra interest a customer had to pay above the minimum rate a dealership could have set.
“We would say that is incorrect, that is not loss, because in a world without DCAs the customer would not have got that rate because the dealer would not have had discretion to go to that rate,” Dally said.
He added that after the watchdog banned DCAs, the average cost of car finance did not decrease. “In a world without DCAs, what would the customer have got?” he said.
The FCA redress scheme would have been much bigger if the Supreme Court had not in August overturned much of an earlier Court of Appeal ruling that had threatened to cripple lenders with compensation costs of up to £44bn.
However, the judges upheld one claim against the banks for “unfair treatment” of a customer whose car financing included a poorly disclosed commission paid to the dealership worth 55 per cent of his total interest costs. The FCA redress scheme will also include similar cases.
Credit: Source link
