Go to court and lose out on £9bn car finance redress scheme, says FCA boss

Consumers risk being left empty-handed if they go to court seeking a payout for allegedly mis-sold car finance instead of using the industry-wide £9.1bn redress scheme, the head of the UK financial watchdog has warned. Nikhil Rathi, chief executive of the Financial Conduct Authority, told the FT that consumers taking their car finance claims to court would be excluded from applying for the watchdog's record redress scheme it launched this week. "If a consumer or their representative does seek to take a case all the way to a hearing they will not be able to access this free-to-use scheme," Rathi said in an interview. "Law firms must be really clear that they are acting in their customers' interests when they are advising them." Rathi's comments position the FCA for a stand-off with claims management companies (CMCs) and law firms, which have already complained that the regulator's scheme is too generous to lenders. Some of them are gearing up to seek higher payouts in court. Courmacs Legal, a Blackburn-based law firm, is set to file a lawsuit against Lloyds Banking Group's Black Horse car finance unit on behalf of more than 30,000 customers seeking £66mn in damages for historic car-leasing agreements. The scandal, which bubbled away for years before reaching the Supreme Court last year, has at times hit the share prices of Britain's biggest banks and forced them to book billions of pounds in provisions to cover compensation costs. It stems from commissions paid by lenders to car dealerships as part of financing for vehicle purchases. The FCA and courts have said many of these commissions were poorly disclosed to consumers and often incentivised dealerships to charge higher interest rates. The FCA said this week it expected the average redress payout to be £829 for each of the 12.1mn car loans eligible under the scheme. But CMCs and law firms believe they can win higher awards of about £1,500 per claim by going to the courts. Rathi, who was appointed to his role in 2020, said he disagreed. "We think it is really unlikely that across the 12mn eligible agreements that we have identified as available for compensation that somehow the courts are going to award all of those higher compensation than in our scheme," he said. The FCA would "hold feet to the fire" if it saw poor practices by either lenders or consumer representatives dealing with car finance claims, Rathi said, adding: "If we see sharp practices from any FCA regulated entity we will take action." The watchdog has already taken action with a number of CMCs it regulates. It imposed voluntary requirements this year that stopped all regulated activities at Riteway Claims and Consumer Credit Justice, according to the FCA register. It also stopped The Claims Protection Agency and Mis Sold PCP from taking on new clients and required Your Money Management to end debt-collection activity with consumers who owed it termination fees on car finance claims. Rathi advised consumers against using CMCs or law firms. "They have a vested interest here in that they may earn as much as 30 per cent of any compensation," he said. "The scheme we have put in place is free to use." The FCA boss welcomed as "positive and constructive" an announcement on Thursday by Lloyds, the UK's biggest car loan provider, that it remained "committed to ensuring customers receive appropriate and timely redress". However, banks are considering bringing a legal challenge against the FCA's scheme that could delay payouts to consumers by at least a year. Lloyds, which has set aside almost £2bn for the scandal, said: "There remain a number of uncertainties including response rates, operational costs and any litigation." There are also concerns that many consumers have signed up with multiple CMCs or law firms to pursue the same claims, with some of them threatening to charge heavy fees for customers who pull out. The FCA has warned firms they should have checked before taking on customers that they were not already represented and urged them not to charge excessive exit fees. Three CMCs have agreed to cut their exit fees for their 500,000 clients, Rathi said. If banks received claims from multiple firms for the same loan they should inform them so they can ask the customer which representative they wanted to continue using, he said. "Ultimately that has to be a decision for a consumer," he added. The FCA this week cut its estimate of the total cost of its redress scheme from an initial figure of £11bn to £9.1bn. But Rathi said this would still be cheaper for banks than not having a scheme, which he estimated would cost them more than £4bn extra in operational costs. The regulator's scheme would help to avoid another scandal similar to the one over payment protection insurance (PPI), which did not have an official redress scheme, lasted nearly a decade and ended up costing banks almost £50bn, Rathi added. "We do not want a repeat of PPI," he said, noting that the final payouts in its car finance redress scheme should happen by early 2028.