Car finance redress ruling triggers hard questions for lenders

Caroline Wayman, who served as CEO of the Financial Ombudsman Service up until 2021 and is now global head of financial services at PA Consulting, cuts through the noise. Deputy BRR editor John Crowley posed her some key questions.

What is your overall impression of the court ruling and FCA interpretation for banks?

After months of uncertainty around commission arrangements and how other financial products might be affected, the ruling and City regulator’s decision to consult on an industry-wide redress scheme brings a much-needed dose of clarity.

Lenders will have breathed a sigh of relief, as the Supreme Court shut down arguments about bribery and lenders having a fiduciary duty. That limits the potential claims against motor finance dealers and the impact on other products with similar undisclosed commissions.

But the FCA’s consultation on a redress scheme means the issue doesn’t simply go away. The ruling still opens up a raft of tricky questions around the fairness of relationships between lenders and customers where there wasn’t a discretionary commission arrangement.

And that’s on top of the discretionary commission issues that the FCA was already considering before the Court of Appeal’s intervention.

The watchdog’s decision to consult on an industry-wide redress scheme is a good step forward. That should be the best way of delivering an orderly, consistent and fair resolution for consumers and businesses alike.

It’s not in anyone’s interests for this to continue to drag on and ensuring people can access fair compensation for any harm suffered – in a way that is practical and proportionate – is important for everyone.

Lenders are asking if it’s practical for them and consumers to chase down paperwork up to 18 years old. But as Nikhil Rathi urges, is it time to stop “haggling” and get on with redress?

In any compensation scheme, working out what records have survived as far back as 2007 and whether there’s enough to go on is part of the territory.

Few industry-wide redress schemes come with perfect records. Chasing down historic paperwork will certainly be a challenge, but it’s best to take a proactive approach rather than dismissing it out of hand.

When overseeing the Financial Ombudsman’s response to Payment Protection Insurance, which incurred a £50bn-plus loss for banks, I saw just how often people uncovered long-forgotten documents that proved they were eligible for compensation.

Time and again, people didn’t expect to receive PPI payouts, only to stumble across old files that showed they had, in fact been mis-sold PPI. To banks that are hesitant to chase down old records, I’d say you’d be amazed at the paperwork customers often keep in their loft.

Five things banks and lenders should do now

1. Record rummage – Banks and lenders must comb through customer records, complaint data, and commission structures dating back to 2007 to identify potentially unfair finance arrangements. It’s essential to pinpoint where high or hidden commissions may have caused consumer harm.
2. Data drill – Firms need to analyse rate ranges, commission levels, and internal policies. Where full data isn’t available, they’ll need to make reasonable assumptions. Expect complexity – and scrutiny of your methodology.
3. Tech test – If firms plan to deploy GenAI or automation to handle customer data or redress, these tools must be transparent, reliable, and auditable. Regulators will expect fairness to be baked in from the start.
4. Calculator countdown – Once the redress calculator is released in the autumn, banks must have an operational framework in place – one that assesses eligibility, quantifies harm, and calculates compensation clearly and consistently.
5. Fix first – Designing effective remediation will be critical. A poorly executed scheme could trigger fresh backlash – or even enforcement. No one wants to end up remediating the remediation.

How much do you think banks will be on the hook for?

The FCA estimates the scheme to cost between £9bn and £18bn, with most consumers receiving less than £950 for each agreement they entered into. That’s a far cry from the £44bn that was being forecast by some analysts.

However, it’s worth remembering that the final bill depends not just on the average compensation awarded and total customers affected, but the number of people who actually come forward for compensation.

There’s a common misconception that all affected customers will claim compensation, but many simply don’t, often due to lack of awareness or inertia.

It’s still too early to say with certainty how much lenders will need to pay out. The final price tag will also be determined by the finer details of the FCA’s redress scheme – for example, whether it’s opt-in or opt-out for customers and the nature of the redress calculation.

The court did uphold one claim from a factory supervisor called the ‘Johnson case’. What does that mean for banks?

The Supreme Court found an unfair relationship in the ‘Johnson case’, deciding that a commission of 55 per cent was excessively high and would have had a ‘material impact’ on the customer’s decision.

But it’s now for the FCA to decide what the tipping point for an unfair relationship is. 55 per cent has been deemed too high – but what should the ‘tipping point’ be?

The regulator is working through this now, and it’s a good time for banks to take a long, hard look at any large, undisclosed commissions across their business and think about whether these could trigger scrutiny or fall foul of the Consumer Credit Act.

What happens next?

The FCA will publish its consultation by early October and finalise any scheme in time for people to start receiving compensation next year.

Lenders shouldn’t sit on their hands over the next few months.

They have a short window to get their house in order and should use this time wisely, because when the regulator publishes the results of its consultation, it will want to crack on with the scheme as quickly as possible.

It’s been a turbulent few months, but it’s important for the whole sector to pull in the same direction now – banks, courts, regulators, and claims management companies alike.

The goal should be to get compensation to people swiftly and proactively where harm has been done. It benefits no one to have this hanging over UK financial services, so the sooner we can draw a line under it and restore customer trust the better.

This article was first published in Banking Risk and Regulation.