6 risks of accepting your lender’s first compensation offer

Many consumers affected by car finance mis-selling will receive compensation offers directly from their lenders under the Financial Conduct Authority’s (FCA) proposed redress scheme.

A prompt offer may appear attractive, particularly if you are looking for certainty and speed after hearing for years that you may be eligible for compensation. However, the first offer you receive from your lender may not be the best available to you, and in some cases, accepting it could limit your options later.

Here are six risks to consider before accepting your lender’s first—or any—compensation offer without seeking legal advice.

1. A compensation offer may reflect only what the redress scheme covers

The FCA’s proposed redress scheme is designed to address specific commission-related features as set out in its consultation document CP25/27, Motor finance redress scheme. It is not intended to address every possible issue across the broader motor finance buying journey.

If you accept an offer from a lender that is based on the regulator’s methodology, you may be accepting an outcome that does not reflect other potential losses or claim types, such as irresponsible lending issues or mis-sold add-ons such as GAP insurance, which sit outside the FCA’s analysis.

This is a vital distinction, as the difference between the compensation you may receive from the redress scheme and your total potential redress for matters related to your motor finance agreement may be significant.

Instructing a solicitor to bring your car finance mis-selling claim may help to identify additional claims and may increase the likelihood of achieving a more substantial overall redress outcome.

2. ‘First offers’ may be made very early

Within Appendix 1 (Draft Handbook text – proposed redress scheme) in CP25/27, the regulator states that: ‘a lender may make an offer in a form that includes the information set out in CONRED 5 Annex 2.1R to the consumer to settle the claim in full and final settlement of all claims relating to the subject matter of the scheme at any time, including before conducting the first step.’

An early offer may reflect a commercial settlement approach rather than a concluded assessment of redress under the scheme methodology. You should treat any early settlement offer with caution and check what claims you are being asked to settle, what rights you are being asked to waive, and whether any claims are explicitly preserved.

3. Settlement terms may limit your options later

The legal effect of accepting an offer is a greater risk than the number written on the letter.

Offers presented and accepted on ‘full and final settlement’ terms may limit your ability to pursue a court claim later in relation to the matters covered by the settlement wording, depending on the precise wording you accept.

At a minimum, you should ensure you understand:

• what specific claims are being settled;
• whether you are being asked to waive any rights; and
• whether the wording preserves your ability to pursue other issues, such as irresponsible lending concerns or mis-sold add-ons.

If you are uncertain, consider seeking legal advice.

4. The redress calculation may be difficult for you to verify

One of the most significant concerns about the FCA’s redress proposals is that they are largely ‘lender led,’ meaning that lenders are responsible for identifying and contacting affected customers, calculating redress, and communicating outcomes.

The regulator’s proposals create a verification challenge when you receive an offer from your lender: the lender holds the data, the assumptions and modelling, and the calculation mechanics. Meanwhile, you are expected to decide whether to accept an offer based on a relatively high-level explanation that may not provide sufficient detail for you to verify the calculation.

This is a common structural risk in mass redress exercises and may be particularly prevalent in motor finance, given that agreements entered into as long ago as April 2007 may be eligible for compensation.

5. Compensatory interest may not match your expectations

You may assume that your compensatory interest award will be substantial, particularly for older agreements and if you have previously seen advertising from law firms and claims management companies that were basing compensation estimates on highly optimistic figures.

There are two points to consider here:

• the FCA’s proposed compensatory interest rate is based on the Bank of England Base Rate plus one percentage point, calculated on a simple basis; but
• you may be eligible to receive a higher compensatory interest rate if you can demonstrate that your higher motor finance payments left you without funds you would otherwise have had, and that this caused you to borrow elsewhere at a higher rate.

The practical implication is that you should not assess the adequacy of a redress offer from your lender by looking at the refunded charges alone. Identify how interest has been applied, from what date, and at what rate; and, if you can, argue for a higher rate of interest to be applied.

6. You may receive less cash than the headline figure

The FCA proposes that: ‘lenders are entitled to set redress off against any monies owed by the consumer to the lender (eg for arrears and defaults), provided these are not subject to an unresolved dispute, complaint or legal claim at the time of the redress calculation.’

This means that:

• you may receive a reduced, or no, cash payment even if redress is due; and
• lenders may choose to reduce your debt rather than make a cash payment.

Set-off is not automatically a ‘bad’ solution, particularly if you are currently in arrears with a lender against whom you have a valid motor finance mis-selling claim, but it changes what you will actually receive and how you should evaluate any offer.

The FCA also proposes that your lender should be permitted to offer to set your redress award off against any outstanding principal balance on an existing agreement, but only with your explicit permission.

What to do before you accept a compensation offer

If you receive a compensation offer from your lender, you should take the time to understand both what you are being offered and what you are being asked to give up.

At a minimum, you should consider doing the following:

• Ask what the offer is: you may receive various communications from your lender, including those asking whether you wish to opt in to the redress scheme or not, as well as early or full and final settlement offers.
• Request a clear breakdown: if not already provided, ask how the lender calculated the redress offer, what assumptions it used, and how compensatory interest was applied.
• Check for set-off: if you have an existing agreement with the same lender, check whether they are proposing to set off any redress against an existing balance or arrears.
• Look beyond commission: consider whether you wish to explore potential additional claims that will merit analysis outside of the redress scheme.
• Take advice: speak to a solicitor if you are unsure about what to do or before agreeing to any ‘full and final’ settlement offer.

Register your motor finance claim with Harcus Parker and let us help you

While the regulator’s proposed motor finance redress scheme is intended to ensure that as many people as possible receive something, some of the potential weaknesses in its proposals could see you receive a compensation offer that does not adequately reflect your losses or position. Lenders are also unlikely to address potential additional heads of claim proactively, meaning that seeking professional advice can both reduce the risk of you accepting an unsuitable offer as well as potentially identify additional claims and increase your overall redress award.

Register your car finance claim with Harcus Parker here, and we can assist with your claim, review any compensation offers you receive, and assess your circumstances to identify potential additional claims.