Experts are warning that the proposed car finance compensation scheme is “unfit for purpose” as it protects lenders more than drivers.
A bombshell new report from the All-Party Parliamentary Group on Fair Banking outlines that the proposed redress scheme put forward by the Financial Conduct Authority (FCA) has been “influenced” by lenders.
It claims that the scheme has been impacted by the consideration of lenders’ profit margins and “comprehensively” fails to provide fair compensation to motorists.
In October, the FCA laid out plans for a compensation scheme for millions of drivers who took out motor finance agreements between April 6, 2007, and November 1, 2024.
The case relates to motor finance companies that failed to disclose important information to motorists when getting a car finance deal, thus breaking the law.
The APPGFB report contains an analysis of 4.1 million car finance claims being dealt with by Courmacs Legal, with 1.5 million drivers impacted by these claims.
Consumers who were impacted by the car finance scandal will receive an average of just £518 for missold discretionary commission arrangements (DCA) loans, according to the report.
This is despite the FCA estimating that successful claimants could receive around £700 per agreement, at a total cost of £8.2billion.
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Experts have slammed the car finance compensation scheme for prioritising the profits of lenders
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GETTY/PAIt also accounted for the “very unlikely event” that 100 per cent of claimants join the compensation scheme, which could cost lenders up to £9.7billion.
The report highlights that the FCA originally estimated that victims would receive £1,100, on average.
It states that motorists who look to receive compensation through the courts could receive an average of £1,500, even after legal costs are deducted.
Dame Siobhain McDonagh, a member of the APPG on Fair Banking, said: “Our core finding is that the FCA has patently been influenced by the profit margins of the lenders when deciding upon levels of redress.
“From proposing that lenders act as judge and jury on their own cases, to the extraordinarily low compensatory interest rate on offer, the scheme acts against the interests of the consumer and markedly favours sector interests.
“Ultimately, this report comes to a clear and unambiguous conclusion – the redress scheme as proposed is not fit for purpose.”
The report also identifies complaints regarding the scheme and how it fails to create an effective deterrent against future misconduct.
It states that the total redress cost to lenders would be around £8.2billion, while the excess profits generated would be in the region of around £15.6billion.
Several of the largest car finance lenders across the UK have already set aside billions of pounds in preparation for the compensation scheme to be rolled out fully.
Darren Smith, managing director of Courmacs Legal, said victims of the scheme were being “sold short”, adding that “real harm was done to vulnerable people”.
The APPG on Fair Banking is calling on the FCA to reflect on the serious concerns included in the report and “revisit” the compensation scheme.
It added that the financial regulator should “work towards a new scheme that is truly independent, fair, and capable of restoring shattered consumer confidence in the market.”