The Financial Conduct Authority (FCA) has warned that planned payouts for consumers mis-sold car loans are likely to be delayed until at least 2027. The UK watchdog is facing multiple legal battles that threaten to derail its compensation scheme, which was initially expected to begin payments this year.
Legal Challenges and Costs
The FCA has already spent over £20 million developing the redress plans, with further costs anticipated. Four separate legal challenges have been filed by companies unhappy with the scheme, which involves paying an average of £829 to an estimated 12.1 million eligible car finance agreements. These agreements involved discretionary commission arrangements, often referred to as hidden commissions, which resulted in motorists receiving unfair deals on car loans.
Sarah Pritchard, deputy chief executive of the FCA, told MPs at the Treasury Select Committee: "I want to be straightforward that the legal challenge will add delay and extra costs to the scheme as a whole. If the scheme goes ahead, the delay, we believe, will result in payments not before 2027."
Who Is Challenging the Scheme?
The financial services arms of carmakers Volkswagen and Mercedes-Benz, along with the car finance arm of French bank Credit Agricole, and Consumer Voice, a group representing consumers, are seeking to quash the scheme, arguing that the rules are unlawful. No UK bank has decided to challenge the scheme, which is estimated to cost the industry £9.1 billion.
In a letter to the committee, FCA chief executive Nikhil Rathi warned that the scheme could be "struck down in whole or part" as a result of the legal challenges. If that happens, the FCA would need to decide on next steps to ensure consumers still receive compensation. One alternative could involve switching to a complaints-led approach for resolving individual claims, which Rathi estimates would cost lenders an additional £6 billion and take three years. Without a scheme in place, the FCA estimates that up to 19 million complaints would need to be handled individually.
Costs and Staffing
Developing the scheme has already cost the FCA £20.5 million over more than two years. The legal challenge is expected to add approximately £2.7 million in costs. Currently, around 80 FCA staff are involved in motor finance-related work.
Meanwhile, Ms Pritchard indicated that the watchdog is exploring ways to potentially pay compensation early for some consumers. "One thing we are exploring is whether there are options for consumers who wish to receive money now, particularly in a rising budget situation," she told the committee. "If consumers wish to receive compensation now, we are exploring what the options for that might be."
"Consumers have been waiting a very long time to be compensated and, one way or the other, they need to be compensated," Ms Pritchard added.
