How the FCA's motor finance commission redress scheme appears to be firming up

Just over a month ago in my previous article, I set out a FCA possible motor finance commisison redress scheme design that I suggested was in line with the FCA's positions at that time, and the FCA redress rules. Although many of the fundamental points remain valid, the FCA's evidence to the House of Commmons Treasury Committee has helped to identify some revisions needed.

The diagram below shows an updated version of the redress scheme that will be consulted on in October, with changes since the earlier version shown in purple text. 'Brokers' here includes (and is mainly) car dealers.

Key points from the evidence to the Treasury Select Committee include (with references to the question numbers in the meeting records):

• The first test will be whether commissions were disclosed in line with the rules that existed at the time (essentially the existence of commission and any supporting information needed to explain a material potential conflict of interest arising from the commission arrangements) (e.g. Q360, Q370, Q413)

• Where the rules that existed at the time were not met, the redress will consider whether a higher interest rate was charged (e.g. Q369) that could have been avoided had the customer shopped around (e.g. Q375). Non-disclosure on its own will not necessarily lead to redress (Q376). Firms will need to review what the effects were (e.g. Q377).

• Critically, a full rebate of commission, in cases where the rules were not met, is the 'default' option where there are no better options (Q369). FCA Chief Executive Nikhill Rathi referred to the full commission plus interest of 3% per year as being the 'high watermark' of a remedy' and spoke of 'methodologies for harm that may lead to numbers below that' based on 'a range of indicators of unfairness'. This appears to be a strong indication that if firms have reasonable information that confirms the actual consumer detriment, based on the interest rate charged compared to the equivalent market rate at the time, that could be used instead to calculate any redress.

Overall, the Select Committee meeting appears to confirm that lenders will need historical data on the commission models in place, what disclosures were made by their intermediaries, and what comparable rates were available elsewhere in the market in each year. Some of this can be retrieved from archived websites and other historical data, please feel free to contact me to discuss.

Although a lot of the evidence to the Select Committee seemed to me quite reasonable - Nikhill Rathi claiming that the FCA "will be pragmatic, proportionate and fair to all sides" (Q380) - one aspect that I do think the regulator has got seriously wrong is its assessment that it there are "good, healthy levels of lending in the market...broadly similar to where they were a year ago".

What this is missing is the long-term shift towards higher interest rates in the market, exceeding the effects of base rate changes, and likely to be partly caused by regulatory uncertainty (see chart below) See my earlier article on this for more details.

It seems vital for protecting consumers that when the FCA publishes its proposed redress scheme it does not lead to any lower cost lenders leaving the market.

Equally, the onus will be on lenders to find historical data to identify the (hopefully relatively few) cases where there was real consumer detriment. It's looking very likely that firms that invest in doing that will end up making lower redress payments. Lenders or their advisers wishing to discuss this are welcome to contact me to discuss.