Car finance redress scheme shows City watchdog ‘nakedly’ siding with lenders, MPs say | Motor finance

A group of cross-party MPs claimed the council regulator was “nakedly siding with lenders” in a planned compensation scheme for car loan victims, adding that the watchdog was “clearly influenced” by concerns about profits.

The All-Party Parliamentary Group (APPG) on Fair Banking has joined a growing chorus of critics concerned about the Financial Conduct Authority’s (FCA) proposed remedial scheme aimed at compensating borrowers who have been overcharged as a result of controversial kickback arrangements between lenders and car dealers.

The APPG’s latest report accused the regulator of falling for “doomsaying” from lenders who claimed a massive compensation bill risked scaring investors and causing lasting damage to the UK economy.

This has come at the expense of car loan victims, who they say should be paid up to £15.6bn instead of the £8.2bn – £9.7bn currently predicted in the FCA’s plan; The APPG said this was based on estimates produced by the regulator in 2019. He also warned that the scheme was based on overly complex calculations that would benefit lenders as they acted as “judge and jury” over their former clients’ claims.

“Rather than siding with consumers in deciding compensation levels, the regulator appears to have openly sided with lenders, seeking to protect profit margins rather than consumers’ pockets,” the report said.

“FCA repeatedly warns ‘higher’ in consultation paper [redress] Costs to firms could negatively impact profit margins, or ‘higher costs to lenders in this scenario could have knock-on effects on lenders’ profit margins’. These warnings all follow the same basic pattern; A warning about profits is that lenders consider the risk that the market will withdraw their products, affecting consumer choice.”

Under the FCA’s recommendations, banks must pay an average of £700 per claim; This is much less than the average £1,500 payout some could receive by taking their case to court, according to the APPG.

But banks and the FCA have warned that debtors who use claims companies to take their cases to court could lose up to 30% of their compensation in legal fees.

Lenders and lobby groups have been warning for months that a major bill could deter investors, force some lenders to pay off their debts or raise borrowing costs for consumers trying to recoup their costs.

Chancellor Rachel Reeves sought to intervene in a landmark high court hearing in January, urging judges to avoid awarding “windfall” compensation to debtors.

At this point lenders such as Lloyds, Barclays, Close Brothers and the financial arms of manufacturers such as Ford were preparing for a compensation bill of up to £44bn. A landmark supreme court case in August provided greater clarity and significantly lowered the regulator’s estimates of the potential compensation bill.

But lenders continued to lobby against the £11bn bill, which also covers administrative costs. Santander UK chief executive Mike Regnier last week called for further intervention from ministers, claiming the FCA’s current proposals could cause “significant” harm to consumers, jobs and the economy generally.

APPG member and Labor MP Siobhain McDonagh claimed that this lobbying work was also reflected in the FCA’s proposals. “Our key finding is that the FCA is clearly influenced by lenders’ profit margins when deciding on compensation levels.

“From proposing that lenders act as judge and jury in their own cases, to the extraordinarily low compensatory interest rate on offer, this plan acts against the interests of the consumer and significantly favors industry interests,” added McDonagh, who also sits as a Treasury committee member. “Ultimately, this report comes to a loud and clear conclusion: the proposed remediation plan is not fit for purpose.”

In a statement, the FCA said: “We have proposed a scheme that will ensure motor finance customers are fairly compensated in a timely and effective manner.

“We recognize that there will be a wide range of views on the plan and that not everyone will get everything they want. But we want to work together on the best possible plan and quickly draw a line under this issue. This certainty is vital so a reliable car finance market can continue to serve millions of families every year.”

The Finance and Leasing Association was contacted for comment.