Motor finance commissions redress: preparing for consultation on the s.404 scheme and the potential for challenge
The motor finance sector is bracing itself for the publication of the long-awaited FCA consultation on a s.404 FSMA consumer redress scheme dealing with historic commissions. . The FCA has confirmed this will be published shortly after markets close tomorrow, Tuesday 7 October.
What is expected from the consultation?
The consultation is set to outline the FCA’s proposed redress scheme under s.404 FSMA, so we can expect clarity on the regulator’s proposals on scope (including time period and types of commission), whether the scheme will operate as opt-in or opt-out, time limits and long-stop, required investigation, assessment and redress calculations, required communications and reporting.
The FCA has already signalled that the consultation window is likely to be a shorter six-week period and given both the extent of the pre-existing work the FCA has undertaken since January 2024 on discretionary commission arrangements and the extensive pre-consultation with industry and stakeholders since the Supreme Court decision in Johnson back at the start of August, we expect this to present what the FCA sees as its near final plan for redress.
What is the potential for challenge of the scheme?
There is a very real possibility that the FCA’s approach could be challenged, but this is likely at this stage to be through consultation responses (as nothing is decided yet). Claims management companies and consumer advocacy groups may argue that the measures do not go far enough to compensate affected consumers, while lenders may object to the scale and retrospective nature of the redress scheme, particularly on sensitive issues such as non-DCA commissions and pre-2014 agreements.
To the extent such challenges persist at the point the FCA publishes its consultation response and final rules (assuming this is a policy statement and further consultation is not necessary), challenges on the final rules can be referred to the Upper Tribunal for review. The process for this is dealt with under s.404D FSMA and explained in CONRED 1.7.
We think that review and challenge is a real possibility, because in spite of the best efforts of the FCA, the regulator has to walk a near impossible tightrope and views on both sides of the divide are already entrenched. There also seems to be a widespread failure to acknowledge that in respect of most of the complaints and claims concerned, the question is ‘where, when and how’ they must be handled, not ‘if’. A more encompassing scheme should, if the design is correct and meets the principles the FCA has been striving for, ultimately be beneficial for both industry and consumers, when the alternative would be complaints and claims falling outside of it clogging up FOS and the courts leading to protracted delay, uncertainty and significantly increased costs.
How would a challenge work and be assessed?
Should challenges to the scheme be made, the tribunal will essentially review challenges on principles similar to judicial review, assessing whether the FCA acted within its powers, followed a fair process and reached a rational and proportionate decision. This ensures that the FCA’s use of its redress scheme rule-making powers is subject to independent oversight without reopening the policy merits of the scheme as a whole.
However, the tribunal’s jurisdiction extends further in two specific respects: it may conduct a full merits review of whether the FCA’s interpretation of the law was correct when setting out (a) examples of failures to comply with requirements and (b) evidential or causation matters within the scheme. Following its review, the tribunal may dismiss the application, quash all or part of the rules, or award damages to the applicant.
What would the impact of a challenge be?
For firms and the market, any challenge could mean prolonged uncertainty, as the regulatory framework would likely remain unsettled until the tribunal’s decision. Markets could experience volatility as investors react to the unpredictability of future liabilities, while consumers might face additional delays in securing any compensation. It could also create a precedent for future regulatory interventions, affecting how the FCA approaches similar issues across financial services sectors that it regulates.
Next steps
In the immediate term, firms should review the consultation carefully and participate actively in the feedback process, ensuring their concerns and perspectives are well articulated. As an industry, we should work on the basis that the goalposts are unlikely to move too much, and the consultation should at least provide some more concrete information against which exposures and provisions can be revisited and operational impacts and readiness assessed.
The coming weeks will be pivotal as industry, regulators and consumer groups digest and respond to the consultation. Whether the proposals are accepted or face a legal challenge, the outcome will significantly influence the future landscape of motor finance in the UK.
The Auxillias team will be ready and waiting for the consultation to land, and will work closely with our clients to support impact assessment, response and forward-looking planning. If you would like a chat, please contact us:
Jo Davis | 07741 240114 | Jo.Davis@auxillias.com
Daksha Mistry | 07458 304068 | Daksha.Mistry@auxillias.com
Paul Godsmark | Paul.Godsmark@auxillias.com
Dan Richards | Daniel.Richards@auxillias.com
