UK watchdog tells banks to stop haggling over car finance redress

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UK lenders must stop “haggling” over a planned multibillion-pound redress scheme for consumers mis-sold car finance, the head of the main financial watchdog has warned, declaring his aim to make it Britain’s last banking scandal requiring mass compensation payouts.

Nikhil Rathi, chief executive of the Financial Conduct Authority, told the Financial Times he had little sympathy for lenders’ complaints that they would struggle to pay redress on car loans granted as far back as 2007 owing to a lack of customer records.

“Now is not the time to haggle with us, but to help put things right for consumers,” Rathi said. “I don’t think it is completely impractical, as I heard one of the trade associations say.”

“We know it is difficult. But you can’t say the law has been broken and it is too difficult to even try to put things right,” he added.

Rathi’s comments came a day after the FCA announced plans to consult on an industry-wide scheme to compensate consumers “treated unfairly” by car financing agreements, which it estimated would cost lenders between £9bn and £18bn.

The scandal stems from commissions paid by lenders to motor dealerships as part of millions of vehicle sales for many years, which the regulator and courts have said incentivised higher interest rates and were insufficiently disclosed to consumers.

Shares in Britain’s main providers of car finance, including Lloyds Banking Group, Close Brothers and Bank of Ireland, rallied on Monday as investors reacted to a Supreme Court judgment that removed the risk of even higher levels of payouts.

But lenders have also questioned the practicality of the FCA’s proposal to pay compensation to consumers for car loans dating back 18 years. 

“We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007, when firms have not been required to hold such dated information, and the evidence base will be patchy at best,” said Stephen Haddrill, head of the Finance and Leasing Association, on Monday.

The regulator will have to rely on lenders to implement its redress scheme and Rathi urged the sector to “talk about practical proportionate solutions here to try and solve some of these issues”. 

“If industry works with us, then we can get this moving quickly,” he said. “If however . . . people want to continue to litigate this and have cases going through the courts for many, many more years, then of course it is going to take longer. But we hope that is not where we are going to be.”

The UK’s highest court on Friday ruled car dealers did not owe a “fiduciary duty” to their customers, reversing a central part of a Court of Appeal judgment last year that sent shockwaves through the banking sector and threatened to saddle the industry with redress costs of up to £44bn.

However, the judges upheld one of the claims 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.

This prompted the FCA to launch a scheme that it hopes will start paying redress to other customers treated unfairly from next year.

Rathi — who was given a second five-year term by chancellor Rachel Reeves in April — said he “absolutely” wanted to ensure this was the last “mass redress” event to hit Britain’s banking sector. 

“This is the only significant redress issue we have on our radar so if we can get this sorted speedily and expeditiously, we hope that can give everybody confidence for the future,” he said, echoing an objective set by Reeves to end “mass redress events” when she unveiled plans to overhaul the UK’s financial complaints system earlier this year.

The FCA banned so-called discretionary commission arrangements, which allowed dealers to keep any extra interest they got customers to pay on car loans, in 2021, shortly after Rathi joined the regulator.

But he said such commissions still breached the rules before then if they were not sufficiently disclosed.

The FCA is yet to decide whether to make redress automatically payable to any eligible customer who does not decline it, or to require people to apply for it. The watchdog has estimated that most people would receive less than £950 in compensation per agreement.

“We want to move as quickly as we possibly can,” said Rathi. “There’s a degree of tension there between timeliness and certainty.”

“An opt-out scheme might take longer because firms have to go and look for all the addresses and go and track down customers who may have moved,” he said. “An opt-in scheme may be quicker, but will be less comprehensive.”