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The UK financial regulator has been urged by members of the House of Lords to shorten the timeframe for its planned multibillion-pound scheme to compensate consumers who were mis-sold car finance.
In a letter to the Financial Conduct Authority, Lord Michael Forsyth said the House of Lords’ financial regulation committee was “concerned by certain aspects” of the watchdog’s plan to set up an industry-wide redress scheme to deal with the scandal over car finance.
The peers’ main concern is the FCA’s proposal for redress to be paid on mis-sold car loans going back as far as 2007, which they said on Friday was likely to “present challenges to both consumers and firms in recovering and processing records”.
Forsyth, chair of the committee, told FCA chief executive Nikhil Rathi that it “may be more appropriate” to align the timeframe of the redress scheme with the six-year deadline from the end of a loan agreement for claims to be brought to a court under the 1974 consumer credit act.
Calling on Rathi to appear before the committee to discuss these issues in September, Forsyth asked the FCA boss what legal advice the regulator had taken on the timeframe for its redress scheme.
He also requested details of the models the watchdog used to estimate that the scheme would cost lenders between £9bn and £18bn.
A landmark judgment by the Supreme Court last week overturned part of an earlier ruling by a lower court to greatly reduce the number of car finance customers who could claim compensation against their lenders. But it upheld one claim, prompting the FCA to propose its redress scheme a couple of days later.
The FCA, which plans to reply to the committee, said: “Many motor finance firms were not complying with rules or the law, which is why we’ll consult on a compensation scheme. Our aim is to ensure the integrity of the motor finance market so it works well for consumers now and in the future. We’ll consult widely on how any scheme should work.”
Stephen Braviner Roman, FCA general counsel, told analysts during a call on Sunday that “lots of cases” in the car finance scandal would not be covered by the six-year limit for cases to be brought to court because of an exemption when “material facts are not known to the individual complainant”.
The peers also published an earlier letter sent by Rathi to the committee on Monday, in which he said the FCA chose a 2007 cut-off point for redress to align with the date from which people could still complain to the Financial Ombudsman Service and the courts.
“We recognise the challenge, particularly around record keeping, this presents,” said Rathi, but “failure to include these agreements in the scheme could prolong uncertainty on motor finance for several years”.
“We therefore think it is in the interest of both consumers and firms for the scheme to go back to 2007 to ensure that complaints in this period are dealt with in an orderly, consistent and efficient way,” he added.
Lenders have already questioned the practicality of the FCA’s proposal to pay compensation to consumers for car loans dating back 18 years.
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Stephen Haddrill, head of the Finance & Leasing Association, said this week that “firms have not been required to hold such dated information, and the evidence base will be patchy at best”.
The scandal stems from commissions paid by lenders to motor dealerships as part of millions of vehicle sales for many years, which the regulator and courts have said incentivised higher interest rates and were insufficiently disclosed to consumers.
Forsyth, whose committee has established itself as a vocal critic of financial regulators since it was created last year, said: “Market uncertainty around redress, as well as the broader burden of regulation, risks rendering certain financial services prohibitively expensive for UK consumers.”
