The alternative redress scheme that could solve the motor finance commissions redress problem

Recent developments in the motor finance commissions redress debacle are all pointing to a slow and complicated outcome.  Now more than ever, an alternative solution is needed that quickly draws a line under this, providing fair redress to people who are likely to have been overcharged. 

Almost everyone is paying the price for the current uncertainty. Lenders have provisions dragging down their business value and ongoing costs. Consumers are already paying substantially more for their finance (see my earlier LinkedIn post here) as the lowest cost lenders, being the firms most impacted by the redress, have either left the market or curtailed lending, and speculation that there could be more exits to come. To many, the FCA is looking weakened with the judicial review applications not having been rejected by the Supreme Court at the first hurdle (as is very often the case) and its recent communications to the market and firms lacking the usual gravitas of one of the world's most respected financial services regulators. 

Whatever the Supreme Court eventually rules seems likely to lead to yet further delays before any redress starts to be paid. Instead, there's a need now to take a step back and set out an alternative, simpler and much fairer alternative. Here's my suggestion. 

Scope of eligibility:

• All motor finance agreements involving an intermediary dealer or broker ('introducer') since 2014, when the FCA took over consumer credit, with certain exceptions. Any claims for earlier agreements will need to be handled by the courts. 
  

• Exception 1: Where the introducer disclosed the existence of commission in line with CONC 4.5.3 and the commission level was set by the lender, not the introducer.
  

• Exception 2: Where the introducer disclosed the existence of commission in line with CONC 4.5.3 and the commission level was set by the introducer and the introducer set the commission at the bottom, or near the bottom, of the range permitted by the lender.
  

• Exception 3: Where the introducer disclosed the existence of commission in line with CONC 4.5.3 and the commission level was set by the introducer and the commission level reflected extra work involved in providing the broking service in line with CONC 4.5.2 on differential commisison rates with the agreement of the lender.

Amount of redress:

• Subject to the three exceptions above, all motor finance agreements will be eligible for redress, calculated on a case-by-case basis to put right any detriment caused by the failure to provide adequate disclosures.
  

• The evidence will be based on a taable of average rates charged in the market in each year for similar agreements (primarily year, similar vehicle type, similar loan size, similar customer credit rating). Much of this information is already publicly available from archived websites, securitisation prospectuses, and other sources. As a starting point, I have data covering rates charged by 15 lenders from 2014 to 2024. Further information could be collated independently by an audit or research firm based on data that firms could share from their internal records. 
  

• For each agreement in scope, the rate paid by the customer will be compared to the average equivalent rate in the market based on the data described above. This will cover all channels, i.e. not only dealer-introduced finance, but also online direct lenders.
  

• If the rate paid was in line with, or below, the average equivalent rate available in the market, then any redress should be limited to a small goodwill payment. In effect, an apology for the technical regulatory error: The customer did not get the disclosure they should have, but they did not suffer a detriment.  Perhaps a £50 payment per deal?  Unless customers get in touch to claim the payment, it could be donated to a relevant charity. 
  

• If the rate paid by the customer was higher than the average rate available, then redress will be the difference between the interest charged and the average rate plus interest on this amount. The outcomes will vary significantly, some below the redress figures envisaged by the FCA based on its models but some could be considerably higher.

That's it. It's not very complicated, and is based on empirical (real-life) data rather than economic models. Although redress will be calculated deal-by-deal, the basis of doing it could be automated using the table of historical rates. 

How to get there

I fully accept it's difficult to see how to break out of what appears to be the endless loop of legal proceedings on this issue. It's likely to need a Government intervention to alter the path. Quite how to get to that would be a point for Government lawyers, but I suspect it could be seen as politically attractive to bring this matter to an end in a way that is seen as fairer to all parties.

So for now, I suggest the priority should be on designing an alternative redress scheme that is widely supported by almost all stakeholders. I'm sure there would be a lot of debate over the details, but on the general principles there could be agreement surprisingly quickly.