Three lenders challenge FCA redress scheme

Three lenders have appealed against the Financial Conduct Authority’s (FCA) motor finance redress scheme, according to a Financial Times report published on 29 April.

Following an initial report from Sky News, the motor finance arms of Mercedes-Benz and Volkswagen both confirmed they had launched a challenge against the scheme. Mercedes-Benz Financial Services UK has previously disclosed a provision of £424 million to cover the costs of administering the scheme and paying redress to affected customers, the largest known provision made by the finance arms of vehicle manufacturers, known as captive lenders. 

Volkswagen Financial Services UK has not publicly disclosed a provision. However, it is thought to have potentially significant exposure to redress payments, as its car finance market share has historically been comparable to both Mercedes-Benz and BMW Financial Services, the latter of which has set aside over £277 million to cover the costs of the scheme. BMW confirmed to the FT that it would not challenge the redress scheme.

That two captive lenders have chosen to challenge the scheme is notable, after the regulator tightened its eligibility criteria in its final rules to exclude zero-APR agreements and tied agreements where lenders can evidence visible links between themselves, the manufacturer, and the car dealer - all changes from consultation that were thought likely to reduce captive lenders’ exposure to the scheme. 

This move may lead to speculation that both Mercedes-Benz and Volkswagen retain significant liabilities tied to the use of discretionary commission arrangements (DCAs) or fixed commissions. However, the FT report noted that some carmakers reportedly felt that the final rules still left scope ‘for people who do not necessarily need the compensation’ to receive redress. The specific elements of the scheme that Mercedes-Benz and Volkswagen are seeking to challenge will no doubt emerge in due course.

Crédit Agricole would not comment on reports that it was the third lender challenging the scheme; however, the FCA confirmed this on 1 May. The firm is expected to have significant redress liabilities arising from financing FIAT vehicles before 2023, when Stellantis began providing financing for FIAT purchases.

The FCA’s scheme is also facing a challenge from advocacy group Consumer Voice, which believes the scheme will leave ‘too many people short-changed.’ Consumer Voice had previously called on the regulator to put consumers first in the redress scheme in its response to the FCA's consultation on the scheme. The Upper Tribunal will now determine which challenges are admissible and when they will be heard, with the regulator likely to call for a resolution as swiftly as possible.

Will these challenges delay the redress scheme?

A delay to the redress scheme is now more likely now that it has emerged that lenders will challenge it. Consumer Voice has previously stated that due to the specific nature of its challenge, which focuses on how lenders will calculate redress, there was no need for the scheme or redress payments to be delayed.

In a statement published on 1 May, the FCA did not mention the potential for delay, as it had earlier in the week, but said it would provide further advice in due course.

What could the challenges mean for the redress scheme?

It is unclear on what grounds the three lenders challenging the scheme are doing so. Because of this, it is not possible to speculate on the potential outcomes of those particular challenges.

However, the challenge brought by Consumer Voice could prompt a revision to the regulator's redress calculation methodology, potentially increasing the estimated average redress per affected agreement from the current figure of £829. Such an outcome may also bring into scope those agreements currently outside the scheme due to the low commission in each agreement.

The FCA retains a range of options for how it chooses to proceed with the scheme, subject to the nature of the challenges, and said that it was engaging with both lenders and consumer groups to determine the next steps for the scheme, including contingency planning.

Register your motor finance claim with Harcus Parker

The regulator has once again encouraged consumers to complain at the earliest opportunity, if they have not already done so. Consumers who complain before the redress scheme begins will receive a response from their lender within three months of the scheme’s start date and should receive any compensation they are owed before those who have not raised a complaint.

The FCA’s redress scheme means you will be able to claim compensation without using professional representation and at no cost. However, there are reasons why you may wish to instruct a solicitor to manage your claim, including a solicitor having the ability to verify your lender’s redress calculations and the potential to identify additional claims, such as those for GAP insurance mis-selling and irresponsible lending. Ensuring your individual and specific circumstances are fully evaluated may help you to secure a more significant compensation award.

Register your claim with Harcus Parker here.