The Financial Conduct Authority (FCA) has published more documents relating to the legal challenges against its proposed car finance compensation scheme.
The documents themselves set out the legal arguments that will be considered by the Upper Tribunal, either later this year or early next. And while they don’t contain many surprises, they do help explain what the dispute is about. Combined with recent comments from FCA Chief Executive Nikhil Rathi to MPs, they provide a clearer picture of what might happen next.
Why is the car finance compensation scheme being challenged?
Many people assume that the legal challenge is about whether consumers should receive compensation at all. However, the position is more complicated.
The three lenders bringing the challenge are not generally arguing that consumers who suffered unfair treatment should receive nothing. Instead, the lenders’ position is that payout calculations are flawed as the FCA scheme assumes that customers whose commission wasn’t clearly disclosed have suffered financial loss – and that the FCA has applied a blanket approach to compensation, rather than looking at each case individually.
Conversely, the Consumer Voice challenge argues almost the opposite. It says the FCA’s scheme could leave some consumers under compensated and prevent people from recovering losses.
Ultimately, the Upper Tribunal isn’t deciding whether there should be a compensation scheme. It is being asked to decide whether the FCA’s proposed approach is the right one.
The FCA understands that consumers are tired of waiting
Speaking to the Treasury Select Committee on 15 July, FCA Chief Executive Nikhil Rathi reiterated his position that the FCA wants people who were treated unfairly to receive compensation as quickly as possible. He also pointed out that only three of around 111 lenders have challenged the scheme.
Mr Rathi acknowledged that many consumers have already been waiting for years – and recognised that many households are dealing with the cost of living, meaning prompt compensation could make a real difference. He quoted a letter from a pensioner who said they hadn’t asked anyone to challenge the scheme on their behalf and would rather receive compensation now than wait months, or even years, for a different outcome.
And Nikhil Rathi made clear that this was by no means an isolated opinion: “We have done some survey work as well so we can understand where sentiment is, and the majority of consumers we have surveyed would like the option of moving forward and receiving a payout if they are entitled, in full knowledge that there is a legal process under way, and that there may be a different outcome that comes out of that process.”
Could consumers settle their claims early?
This was one of the most interesting parts of the hearing. Although the FCA car finance redress scheme has been partially suspended pending the outcome of the legal challenges, Mr Rathi said that lenders are still free to make settlement offers if they choose to, and that the FCA is already talking to lenders and some claimant law firms about how this could work.
In simple terms, if a lender wants to offer compensation in line with the FCA’s proposed scheme, and a consumer is happy to accept it, there is nothing stopping the two sides from reaching an agreement before the court case is over.
That doesn’t mean that every affected consumer will receive an early settlement offer immediately. But it is a clear indication that consumers may not necessarily have to wait until the legal challenge is finished before receiving compensation.
The FCA also emphasised that it expects settlement offers to be fair. Mr Rathi told MPs that the FCA would “take a very dim view” of lenders trying to settle claims for less than consumers would receive under the compensation scheme. Instead, the FCA expects any voluntary settlements to reflect the compensation set out in its proposed rules.
What happens now?
For now, the legal challenge is ongoing, and the FCA’s compensation scheme has not yet been implemented. However, the latest developments give us a better understanding of where things stand.
The legal documents confirm that the court will largely be deciding whether the FCA has chosen the right way to calculate compensation. Meanwhile, the FCA has again reiterated that it will defend the scheme robustly and is exploring whether some consumers could receive compensation through voluntary settlements before the legal challenge is resolved.
Whether lenders decide to make those offers remains to be seen. But for consumers who believe they were affected by mis-sold car finance, these developments show that the situation is continuing to move forward.
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