What could FCA motor finance commission redress look like?

There's been a lot of commentary on the difficultes in designing the FCA motor finance commission redress scheme, but few suggestions about how to overcome them. Below I set out a possible redress scheme design that could be fair to both consumers and the industry, and in line with the the FCA's Principles of a motor finance redress scheme.

Key points:

1. Scope of redress: The following would be in line with the FCA consumer redress schemes handbook, CONRED:

   • Redress period to start from April 2014, when the FCA handbook rules took effect

   • Limited to regulated agreements

   • Limited to compliance with FCA handbook rules that existed at the time

   • Redress based on the likely financial loss caused to the customer

   • Automatic qualification, i.e. no need for complaints / claims from consumers
     

2. First test will be whether Difference in Charges commissions, where relevant, were set at unjustified levels contrary to CONC 4.5.2, i.e. A lender should only offer to, or enter into with, a firm a commission agreement providing for differential commission rates or providing for payments based on the volume and profitability of business where such payments are justified based on the extra work of the firm involved in that business.
   

3. Second test will be whether the existence of unusually high commissions, whether or not discretionary, were adequately disclosed to customers.

   • The starting point would be simply whether the existence of commission was disclosed in line with CONC 4.5.3.

   • The FCA might then apply its further interpretation of CONC 4.5.3 (that forms part of the Barclays judicial review challenge) that more details of the potential conflict of interest should have been disclosed...

   • ...but even if that argument falls aside for the FCA, I expect that following the Supreme Court judgement, the FCA will apply Principle 6, Treating Customers Fairly, to argue that high commissions (alongside some other complications such as 'right of first refusal') could be unfair unless they were adequately disclosed. 
     

4. Any agreements failing either test will be eligible for redress only if, and only to the extent, the rate charged exceeded what the customer is likely to have obtained elsewhere in the market.

   • Lenders might make a token 'inconvenience' ex-gratia payment where conduct was non-compliant but there was no customer harm. 
     

5. If the above process proves to be correct, a key implication is that the data required for individual agreements would be limited and therefore less likely to have been deleted

   • Arguments that this information must be deleted after the end of agreements might apply to personal information used for the application such as ID or vulnerable customers. However firms are likely to (very reasonably) keep basic information about agreements for six years after the end of an agreement for marketing, tax or regulatory purposes. Therefore if the redress covers agreements started since 2014 (as above), GDPR seems unlikely to be an issue for high-level information about agreements (such as customer name, deposit, advance, APR, introducer, commission paid, agreement status).

   • Other evidence required to carry out the tests would be policies and procedures over the period, together with intermediary commission disclosures. For car dealers, the disclosures are likely to be available from archived websites.

   • Once this information is collected, there would be no manual 'case by case' assessment of agreements. Agreement testing and redress calculations would be a simple automated procedure, not incurring significant expense.  

The FCA plans to open a consultation on its plans for redress in early October. If this turns out to be broadly right, lenders will need market-wide rata on rates by year for different customer types. I have a first version of this now available. I will also be happy to discuss any other part of building the evidence base that would be needed, including researching legacy websites, and developing cost-based rationale for different levels of intermediary commissions.