(March 31): The UK’s motor finance industry is expected to pay about £2 billion less for a revised redress programme for consumers who were mis-sold car loans.
The Financial Conduct Authority has “modestly” tightened the conditions for borrowers to receive compensation, meaning 12.1 million loans are eligible, down from 14.2 million last year, according to a statement on Monday outlining the final shape of the compensation plan.
Lenders should expect to pay £7.5 billion in compensation, down from £8.2 billion previously, and the estimated costs of running the “streamlined” redress scheme are now 40% lower, the FCA said. This means the programme is set to cost the industry £9.1 billion overall, down from £11 billion in the previous version.
That approach will likely cheer affected firms, including banks such as Lloyds Banking Group plc and car firms with lending operations such as Mercedes-Benz Group AG. The industry has spent months arguing that the regulator’s proposals were too strict and failed to take proper account of last year’s Supreme Court ruling.
“It’s not as bad as it could’ve been if they’d stuck their heels in,” said Gary Greenwood, an analyst at Shore Capital Group Ltd.
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Firms have already set aside billions of pounds to pay affected customers. Lloyds, which earlier had disclosed the largest known provision — at almost £2 billion — said Tuesday in a statement that it’s assessing the implications of the final rules and will update the market “as and when appropriate". Bank of Ireland Group plc, which has set aside €429 million, also said it was evaluating the impact.
Other firms that have taken nine-figure charges include Mercedes-Benz, Close Brothers Group plc and Barclays plc.
Shares of Lloyds and Barclays were little changed in early London trading on Tuesday. Bank of Ireland was down as much as 1.9%, while Close Brothers rose as much as 2.8%.
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“There’s nothing stopping lenders moving tomorrow if they wanted to,” though they are likely to take some time to digest the details before repaying customers, Nikhil Rathi, chief executive officer of the FCA, said on a media call late Monday. “We’re going to be holding lenders’ feet to the fire.”
Under the new version of the programme, the FCA said the average redress payment will rise slightly to £829 per customer, up from about £700 in the original plan. This is offset by a lower estimated take-up rate of about 75% of eligible customers, down from 85%.
Operating costs have been cut through measures such as no longer requiring banks to send letters to customers by recorded mail, according to the regulator.
Most customers will get back an average estimated loss, plus interest. Around one in three payments will be capped because “consumers should not be compensated more than if they had been treated fairly", the FCA added. A small number of people who bought very valuable vehicles are also excluded.
Just 90,000 customers will get back all the commission they paid plus interest, the FCA said, limiting this compensation to those who were charged “very high” commission.
Borrowers who took out loans before 2014 will be treated separately, the FCA said, with a slightly higher average interest rate applied. Banks have raised concerns that older cases might be missing paperwork — one element that could lead to a legal challenge to parts of the compensation programme.
The FCA said earlier on Monday it will work with other regulators to tackle any law firms and claims management companies that treat customers unfairly, for example through high exit fees or false advertising.
The regulator has taken a “pragmatic and proportionate approach", said Rachael Jones, director of automotive finance at car sales site Autotrader. “It’s vital that this scheme doesn’t inadvertently impact a market that has adapted and is now working well for consumers.”
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