Victims of the car loans scandal could miss out on more than £4bn in compensation if the City regulator ploughs ahead with plans for an “insulting” interest rate in its redress scheme, consumer groups and claims firms say.
The Financial Conduct Authority (FCA) has been accused of offering a reduced rate of interest which will be added to compensation from banks for borrowers caught up in the car loan commissions scandal.
Claims law firms and consumer groups say borrowers should be offered the same terms as Marcus Johnson: the sole driver whose case was upheld by the supreme court in a landmark case in August.
While the terms of the final payout are sealed, Johnson is widely believed by industry experts to have received about 7% interest on his compensation package, after judges ordered the parties to negotiate a “commercial rate”. But the watchdog has proposed a rate of 2.09% on the compensation.
The FCA has estimated that victims payouts will average £700 resulting from 14m unfair loans, costing lenders – including Lloyds, Barclays, Close Brothers and the financial arms of manufacturers like Ford – a combined £11bn.
Critics say these terms are “unacceptable” and will ultimately rob drivers of another £4bn of compensation, based on calculations outlined in the FCA’s own consultation documents.
Darren Smith, the managing director of the claims law firm Courmacs Legal, said: “The FCA’s proposal to cap interest at 2.09% is frankly insulting to the millions of victims who were overcharged, many well over a decade ago.”
He said lenders would not stand for cut-price rates being offered to consumers. “It exposes a staggering hypocrisy,” Smith said. “If the boot was on the other foot, and a bank was a successful claimant in a commercial dispute, would they meekly accept 2.09% on their losses? [Lloyds Banking Group’s chief executive] Charlie Nunn would rightly be asking the general counsel at Lloyds to demand the full commercial rate of interest from the wrongdoer.”
The scheme is meant to draw a line under the scandal, which centres on unfair loan commission payments paid to car dealers by banks and specialist lenders. The FCA has estimated that 14m historic car loan contracts that may be deemed unfair because of these commission payments.
When discounting administrative costs, about £9.7bn of the £11bn sum will go straight to consumers. However, that sum is based on paying out a 2.09% annual interest rate on base levels of compensation.
Marcus Johnson, whose case was upheld by the supreme court in a landmark case in August. Photograph: Dimitris Legakis/The Guardian
Consumers would be due £14.3bn if the interest rate were closer to 8%, according to FCA documents. That rate of 8% is what has historically been paid out alongside successful county court cases, and by the Financial Ombudsman Service before its own rates were cut earlier this year.
The current proposals mean a consumer will on average receive about £700 in compensation, rather than £1,030 at the 8% rate.
“The interest rate is way too low, in my view,” said Martin Lewis, the founder of MoneySavingExpert, in his BBC podcast this month, adding that he was planning to raise the issue in his response to the FCA consultation.
Kevin Durkin, of HD Law, who represented Johnson during his supreme court case, agreed, told the Guardian that the FCA’s proposals were “unfair” and did “not adequately compensate consumers enough for the many years they’ve suffered under an unfair relationship with their lender. The FCA redress scheme should reflect what the supreme court awarded to Mr Johnson.”
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Consumer advocates have also raised concerns. Alex Neill, a co-founder of the consumer rights organisation Consumer Voice, said: “The proposed rate of interest is unacceptable and would leave drivers losing out on £4bn they’re rightly owed.
“Suggesting that those hit hardest – who have already faced extra costs due to this mis-selling scandal – should negotiate for a fair rate themselves is clearly unworkable.”
However, the Financing and Leasing Association (FLA) said the interest rate should reflect changes to compensation payouts at the FOS, which earlier this year were cut from 8% to the average Bank of England base rate, plus 1%. “The FCA is applying the same rate” in its redress scheme, the FLA said.
An FCA spokesperson said: “Our proposals take account of court decisions on redress. We believe interest that links to the Bank [of England] base rate is fair, proportionate and aligns with the planned approach of the Financial Ombudsman.
“Consumers would have the right to challenge this if they have evidence this was unfair to them. We welcome feedback on our proposals.”
Lloyds declined to comment.
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