The FCA’s proposed Motor Finance Redress Scheme

The FCA has a big problem with its proposed Motor Finance Redress Scheme, and it stems from what the Supreme Court decided last August in what has become known as the Johnson case¹.

In brief, for the FCA to justify a scheme of this kind, it now has to prove that there was an unfair relationship between lenders and borrowers. Each borrower would need to have its own legal cause of action, based on an unfair relationship with the lender. The Supreme Court could not have put it more clearly:

“The application of the test [of unfairness] in each case will, inevitably, be a highly fact-sensitive exercise” (297). The Court also held that “The relationship [between Mr Johnson and FirstRand ] was unfair within the meaning of section 140A of the CCA, by reason in particular of the size of the commission, the failure to disclose the commission, and the concealment of the commercial tie between the dealer and FirstRand” (340); and “the mere fact that there has been no disclosure of the commission, or only partial disclosure, will not necessarily suffice of itself to make the relationship between lender and customer unfair… It is a factor to be taken into account in the overall balancing exercise required under section 140A” (320).

The FCA has to accept that critically important analysis of the relations between lenders, dealers and borrowers in the motor finance market. The Supreme Court dismissed all the previous arguments that in some way there was bribery or equity/fiduciary relationships.

The FCA is taking a short cut, by making assumptions: that throughout the whole of the period from 2007 to 2024, lenders have always engaged in unfair relationships with borrowers on every occasion in which there has been in existence, but inadequate disclosed, any of the following: discretionary commission arrangements (DCAs) – 37 per cent of all motor car finance cases; very high dealer commissions – 9.5 per cent; tying agreements between lenders and dealers: 10.5 per cent. This is far from “an overall balancing exercise”: it is on the contrary a new retrospective set of command-and-control rules in the car finance market.

If indeed in all the DCA-alone motor finance agreements, there was inadequate disclosure of a link between commissions and APRs, what is per se unfair to the buyer if the APR and the total package was set at competitive levels, without exorbitantly high commissions? The fact that the FCA has to rely on a judgment of the High Court in 2024, finding unfairness based on a stand-alone, non-disclosure of a DCA, merely demonstrates that on the facts of that case, unfairness was found. One judicial review of a decision by the FOS is not the strongest peg on which to hang a charge of unfairness against all DCA-alone agreements.

As to high commissions, the facts in Johnson involved very high commission and tying, and neither disclosed. The Consultation paper, on the other hand, embarks on a “econometric” exercise to establish the point at which commissions are at a level deemed high under the Scheme and then applies that level retrospectively, back to 2007, where those levels are significantly below those present in the Johnson case.

As to ties, the FCA appears to admit this is a complex matter but again considers any inadequate disclosure is sufficient, on its own, to make the relationship unfair. This does not appear consistent with the Supreme Court’s decision, nor its definitive statement that breach of a regulatory disclosure rule does not on its own create an unfair relationship.

Whereas the Supreme Court has established sanity and clarity, the FCA appears to be causing confusion, not least as to why it proposes that redress can go back as far as 2007 (noting there were no binding disclosure rules until 2014), and serious concern as to the scale and cost of the redress, at over £11 billion. Of course, over a period of 17 years (2007-2024), there are bound to be cases of “unfair relationships” including those that involve inadequate disclosure of components of transactions. But for the FCA to put its case that no less than 43.6 per cent of all motor finance agreements over that period have been unfair not only stretches credulity, but also calls into question what the FCA was doing over a large part of that period, and the reasonableness and proportionality of its proposed Scheme. We await its decision with interest, as does the market.

Authors John Swift KC, author of the Lessons Learned Review published in November 2021, commissioned by the Non-Executive Directors of the FCA, into the FCA/FSA’s supervisory intervention/redress scheme relating to the sale of interest rate hedging products to SMEs, and David Capps, who led Mr. Swift’s support team on that review and is now a financial regulatory partner at the international law firm, Stephenson Harwood.

¹Hopcraft and another (Respondents) v Close Brothers Limited (Appellant); Johnson (Respondent) v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance (Appellant); Wrench (Respondent) v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance (Appellant) [2025] UKSC 33 https://supremecourt.uk/uploads/uksc_2024_0157_0158_0159_judgment_updated_3rd_Sept_4a120f2cfa.pdf

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