City Watchdog under Fire over Lack of Clarity in Car Loan Redress Scheme

The Financial Conduct Authority (FCA) is facing sharp scrutiny from the House of Lords over its proposed £11 billion compensation scheme for mis-sold motor finance. Senior FCA executives, including chief executive Nikhil Rathi, were grilled by peers on the scheme’s construction, clarity, and the extended time frame for eligible claims, with transactions dating back as far as 2007.

Lord Grabiner questioned the lack of differentiation in the proposals between cases involving deliberate concealment and those without, warning of deep ambiguity in the supporting documentation. The FCA’s plan could allow claims on car loan agreements as old as 18 years, prompting Lord Forsyth, the committee chair, to challenge Rathi on regulatory oversight by asking whether the watchdog had been “asleep at the switch.”

The motor finance sector, including major banks such as Lloyds Banking Group and Close Brothers, now faces the prospect of not only funding compensation payments estimated at £8.2 billion but also running the redress programme, with additional costs of £2.8 billion. The FCA estimates that 14.2 million motor finance contracts—representing nearly half of all such loans since April 2007—could be ruled unfair under the outlined criteria.

At the heart of the scandal lies the industry’s failure to properly inform consumers about commission payments made to car dealers arranging finance. Grabiner highlighted that the FCA’s plan does not distinguish between concealed and openly disclosed arrangements, creating a risk of “deep lack of clarity” for both consumers and firms.

Rathi defended the regulator’s timeline, citing initial focus on higher-profile consumer credit issues and pandemic-induced delays. He reiterated that cases with adequate disclosure by firms would not qualify for redress. Still, Lord Vaux pointed out inconsistencies, noting the FCA had itself admitted in 2019 that commission disclosures were not always sufficiently prominent, partially due to unclear regulations at the time.

The redress proposals are subject to consultation and could yet face legal challenges. The FCA maintains its approach offers the most efficient route to resolution, with recent court judgments reinforcing industry liabilities regardless of the regulator’s scheme.