Why we should accept the FCA motor redress scheme and draw a line under this sorry saga

There’s not often disagreements between the consumer lobby – but it does happen from time to time. Earlier today, the consumer group Consumer Voice announced its intention to lead a legal challenge against the FCA’s motor redress scheme – claiming that consumers have been short-changed by the regulator. I don’t agree and – to use a Gavin and Staceyism – I’ll tell you for why.

Before I do – I first want to say that I have huge respect for Consumer Voice and am even working with them in my claim against Apple. I’ve known Nikki and Alex (its founders) for 17 years – back from the days when we worked together at Which?. And I really like them both personally.

But on this point, we find ourselves on opposite sides of the argument.

A scandal unlike any other

The motor finance “mis-selling” scandal is not really like any other mass redress scandal of recent years. While it was pretty shocking behaviour by lenders and motor dealers, customers were not trapped into taking out these deals - as was the case in many other scandals (more on which later).

The FCA first started looking at the market in 2019 and decided to ban discretionary commission arrangements in 2021. These were arrangements where lenders allowed car dealers to set the customer's interest rate - keeping any additional amount above the lender's rate for themselves.

A few years later, some cases relating to these kind of arrangements were upheld at the financial ombudsman service and it became clear that customers who had taken out these plans may be owed some redress. Following this, some challenges to the legality of the agreements started to be taken through the courts.

Last year, two cases ended up in the Supreme Court. Although the initial High Court ruling had said that dealers owe a fiduciary duty to customers and had breached that by not acting in their interests – the Supreme Court did not agree. Nevertheless, it did rule that high undisclosed commissions represented an unfair relationship between the dealer and the customer.

The FCA then began consulting on its redress scheme - publishing its final proposals a few weeks ago - which would mean consumers receive around £7.5bn in compensation.

It's important to say that I’m not defending the behaviour of lenders and dealers in this episode. DCAs led to consumers paying hundreds of pounds more for their motor finance than they might have done if they'd taken out a personal loan - and these were rightly banned by the FCA, while the court rulings have led to commissions now being widely disclosed.

But as I said above, what differs with this scandal and others that preceded it is that consumers weren't trapped. They could have shopped around for motor finance - and while most car dealers may have been up to these kind of tactics, they weren't obliged to take credit from the dealer. There's a competitive market for consumer credit as a whole and they could have looked elsewhere. It's also possible that while they overpaid for credit, the price of the car was discounted by agreeing to take credit out with the dealer.

Although disclosure of commissions became a big deal in the courts - I'm also not convinced that transparency here would have been that relevant to the decision that people took. It's highly likely that even if the commissions had been disclosed, the vast majority of consumers would have taken the same course of action. We know from behavioural science that consumers caught up in the excitement of buying a car are unlikely to be acting as discerning consumers when it comes to car finance. They are looking at the monthly payments, working out if they can afford them, and pushing ahead if it all fits within their budget.

We can't compensate every bad deal in financial services

Sadly, people get ripped off all the time. For years, firms have taken advantage of the information asymmetry in financial markets. But over the last few years, regulation has raised standards, improved competition and outcomes have improved.

In cases where consumers were free to make a different choice, I think it's unworkable to say that all consumers should be compensated if they got a bad deal in the past – particularly in competitive markets where there was not necessarily any barrier to getting them shopping around.

If we think about the world of pensions and investments, there are plenty of people who were charged far too much in the past – and plenty of ongoing pockets of poor value today. But in most cases, customers were free to switch, or are free to switch. Should we compensate everyone who paid 1.5% for their pensions (or Halifax tracker fund?!) when it’s now possible to get pensions that charge a quarter of that (and trackers that charge a tenth)? I’m not convinced. We should regulate markets to create the conditions for better outcomes tomorrow – but I don't think we can go back and right every bad deal that consumers got retrospectively.

I take the point that when it comes to motor finance, there is a matter of law here - and consumers need to and will be compensated. But at a principles level, I don't think we can go back and right every historic wrong - as there is an astonishing amount of it - and at the time, these practices were common place.

Although I haven't agreed with much of the financial services rhetoric and policy coming out of the Treasury over the last 18 months, I do accept the point that firms need to have some kind of predictability. It creates an impossible environment for firms to be constantly on tenterhooks waiting to discover whether the wrongs of the past are going to be prosecuted at some point in the future.

Not a mis-selling scandal

What differs between this mass redress event and previous ones is that consumers were not “mis-sold” as such. They wanted to buy a car and they were sold finance to support them. It was the right product at the wrong price. Although they paid too much, they still got use of their nice new car – and the headline price of the vehicle may have been discounted if they took up the in-house finance.

In contrast, if we think about PPI, people were sold insurance that they could never claim on, or didn’t even know they were buying. It’s quite a different premise.

The FCA scheme seems pretty generous to me. If you bought a car 10 years ago and overpaid for your finance – the likelihood is that you were totally unaware that you overpaid until the FCA got involved a few years ago. Alternatively, you were aware and you were fine with it. Either way, you’re now in line to get a pay out of around £800 – maybe more. Most people would see that as a result.

It’s also no secret that these are tough economic times - and the £7.5bn that is teed up to be paid to consumers will be a massive boost to many households. But the latest challenge in the courts could hold all that up – and is likely to leave the motor finance scandal dragging on for many months longer. In fairness, Consumer Voice have recommended that the scheme set up continues and that their challenge is expedited. But that is not a call that they are in control of.

It’s not hard to see why claims management companies want to see Consumer Voice succeed. For the cases they get to run, CMCs take up to 30% of any payout. So the bigger the pot, the bigger their payday. This will inevitably be a calculated decision by the funders of the case – Courmacs – who are thinking that even if they lose, the publicity may drive more consumers into their arms.

Let’s hope the case can be expedited and does not add too much time to the whole saga. These kind of events give the whole industry a bad name – and it would be good to draw a line under the whole thing.