What Should Motor Finance Lenders Do Right Now?
Last week the FCA published details of the Motor Finance Redress Scheme – and lenders need to act now.
The scheme is estimated to cover over 12 million discretionary commission arrangements which were not properly disclosed to customers. The redress programme is divided into Scheme 1 covering agreements made from April 2007 to March 2014 and Scheme 2 covering agreements made from April 2014 to November 2024.
Which agreements are unfair?
The agreements that are deemed unfair by the FCA rules are those where there was “inadequate disclosure”, a high commission arrangement (defined as being equal to or greater than 39% of the total cost of credit and equal to or greater than 10% of the loan value) or those where a contract gave the lender exclusivity or a right of first refusal.
How much redress will customers receive?
Many cases will have their redress calculated through a “hybrid remedy” – combining the average commission repayment and an APR adjustment. Cases that are found to closely resemble the initial Johnson vs First Rand court case will receive a full commission refund plus interest.
To avoid overcompensation, the scheme sets out three “caps” for redress. Redress will be limited to 90% of commission plus interest, the total cost of credit adjusted for the minimal cost of credit or unadjusted realised total cost of credit – whichever of 3 is lowest for each arrangement.
What else has changed since the consultation paper?
That measure of what counts as high commission has been raised from an initially proposed 35% – reducing the number of eligible cases by approximately 2 million.
The number of in-scope arrangements is also reduced by newly introduced minimum threshold, with any case where the total commission was less than £120 for Scheme 1 or £150 for Scheme 2 being ineligible, and by the exclusion of any agreement that had a 0% APR.
There are also some changes to the customer contact arrangements – consumers who have complained and previously been rejected but who fall within scope need to be proactively contacted and invited to join the scheme. The requirement to contact customers who have not had a relevant agreement has been removed, as has the initial proposal that all customer letters be sent with recorded delivery.
The clock is ticking
The FCA’s October consultation paper suggested that the scheme would start immediately, the day after publication. This has been revised and firms have until June 30th for Scheme 2 to be fully operational and they need to have Scheme 1 in place by August 31st.
More immediately, all in-scope firms must notify the FCA of their intention to use the scheme and share the details of their designated Senior Manager before April 22nd. From there, lenders will need to submit their Implementation Plan and Delivery Forecast by May 6th.
On September 30th redress decisions are due for already-received complaints within Scheme 2, followed by November 30th for existing complaints within Scheme 1.
Firms need to have contacted all customers with an in-scope arrangement inviting them to complain by December 31st for Scheme 2 and February 28th 2027 for Scheme 1.
Finally, August 31st 2027 is the deadline for consumers to join either scheme.
Immediate action plan for firms
Organisations should already be selecting the best individual to be the Senior Manager for their scheme. They should also be re-running exposure models taking into account the changes to scope since the consultation paper.
It’s going to be vital to quickly but thoroughly map out all agreements that fall under each scheme, especially where legacy data needs to be retrieved.
The Implementation Plans due next month need to include details of how the firm is going to identify relevant arrangements, the Quality Assurance frameworks, outsourcing arrangements and the cohort decisioning approach. Putting this together should be seen as an opportunity for detailed planning that can then be put into practice, and not viewed as a box-ticking exercise.
Are you ready?
There is a huge amount of work to be done, beginning right now with the top-level strategy decisions, which will soon expand to customer contact and complaint handling demand levels that the Financial Services world hasn’t seen since PPI.
Kind Consultancy can help. We work with some of the best regulatory experts in the UK and maintain a bench of exceptional complaint handling contractors with specific Motor Finance knowledge and experience.
If you have any concerns about talent and resource relating to Motor Finance Redress, Kind may be able to help. Contact us via www.kindconsultancy.com or on 01216432100 today.
