Victims robbed of £4bn in ‘insulting’ car loan redress scheme, say claims firms | Motor finance

Victims of the car loan scandal could miss out on more than £4 billion in compensation if the council regulator goes ahead with plans for a “degrading” interest rate in the compensation scheme, consumer groups and claims firms say.

The Financial Conduct Authority (FCA) has been accused of offering a discounted interest rate to be added to banks’ compensation for borrowers caught up in the car loan commission scandal.

Claims law firms and consumer groups say debtors should be offered the same terms as Marcus Johnson: the only driver whose case was approved by the high court in a landmark case in August.

Although the terms of the final payout have been finalised, industry experts believe Johnson received around 7% interest on the severance package after judges instructed the parties to negotiate a “commercial rate”. However, the watchdog recommended a rate of 2.09 percent for compensation.

The FCA estimates that an average of £14 million in payouts to victims will come from unfair loans, costing lenders, including the financial arms of manufacturers such as Lloyds, Barclays, Close Brothers and Ford, a total of £11 billion.

Critics say these terms are “unacceptable” and, based on calculations set out in the FCA’s own consultation documents, will ultimately lead to compensation being collected from drivers worth £4bn.

Darren Smith, managing director of claims law firm Courmacs Legal, said: “The FCA’s proposal to cap interest at 2.09% is frankly insulting to the millions of victims, many of whom were overcharged more than a decade ago.”

He said lenders cannot stand when consumers are offered cut-price rates. “This reveals astonishing hypocrisy,” Smith said. “If the situation were reversed and a bank was a successful plaintiff in a commercial dispute, would it meekly accept 2.09% of its losses? [Lloyds Banking Group’s chief executive] Charlie Nunn would rightly have urged Lloyds’ general counsel to demand the full trading interest rate from the offender.”

The plan is intended to draw a line at the scandal focusing on unfair credit commission payments paid by banks and specialist lenders to car dealers. The FCA estimated that: 14 million historic car loan agreements that may be considered unfair because of these commission payments.

Once administrative costs are deducted, around £9.7bn of the £11bn total will go directly to consumers. However, this amount is based on the payment of an interest rate of 2.09% per annum on basic compensation levels.

According to FCA documents, consumers will be paid £14.3bn if the interest rate is close to 8 per cent. This 8% rate is what was paid by the Financial Ombudsman Service alongside its historically successful county court cases and before its own rates were cut earlier this year.

Current proposals mean a consumer will receive an average of £700 in compensation instead of £1,030 at 8%.

“In my opinion, the interest rate is too low,” said Martin Lewis, founder of MoneySavingExpert. BBC podcast this monthIt added that it planned to raise the issue in its response to the FCA consultation.

Kevin Durkin of HD Law, who represented Johnson in the high court case, agreed, telling the Guardian the FCA’s proposals were “unfair” and “failed to adequately compensate consumers for the many years they have suffered from unfair dealings with their lenders. The FCA compensation plan must reflect the high court’s decision against Mr Johnson.”

Consumer advocates also voiced concerns. Alex Neill, co-founder of consumer rights organization Consumer Voice, said: “The proposed interest rate is unacceptable and will see drivers lose £4 billion they are rightfully owed.

“It is clearly unworkable to suggest that those most affected, who are already facing extra costs as a result of this mis-selling scandal, should bargain for a fair rate.”

But the Finance and Leasing Association (FLA) said the interest rate should reflect changes to compensation payments on FOS, which were reduced from 8 per cent at the beginning of this year to the Bank of England average base rate plus 1 per cent. The FLA said it “applies the same rate as the FCA in its compensation scheme”.

An FCA spokesperson said: “Our recommendations take into account court decisions regarding compensation. We believe there is interest linked to the bank.” [of England] The base rate is fair, proportionate and consistent with the Financial Ombudsman’s planned approach.

“Consumers will have the right to object if they have evidence that this is unfair to them. We welcome feedback on our proposals.”

Lloyds declined to comment.