The UK’s financial watchdog prioritised making its £9.1 billion motor finance compensation scheme cheaper for lenders over protecting drivers, a consumer rights group has claimed.
Consumer Voice is one of the parties challenging the Financial Conduct Authority’s (FCA) plans to compensate drivers who were mis-sold a car loan between 2007 and 2024.
An estimated 12.1 million car finance agreements that are eligible for redress, at an average of £829 per payout, under the FCA’s scheme.
Consumer Voice, which is represented by solicitors Courmacs Legal, argues that consumers will be “short-changed” by the scheme in its current form.
In court filings, the FCA is accused of deciding on a compensatory interest rate that “knowingly set the floor below the actual borrowing costs of most consumers”.
This refers to the watchdog’s decision to make the minimum interest that people will be paid on compensation at 3%, based on the annual average Bank of England base rate plus 1%.
The legal document claims the decision, having considered an additional 8% on the Bank’s base rate, was driven by a desire to limit the financial strain to lenders, simplify the scheme and reach a final decision quickly.
It said the FCA “made firm impact and operational simplicity the dominant consideration in its decision-making”.
“Whilst the FCA recognised that an 8% rate would directly address consumer concerns, it rejected this on the basis that it “would significantly increase total redress costs for firms”, the risk of challenge by lenders and market impacts,” the document read.
“The FCA’s own data showed that unsecured personal loan rates exceeded 3% for almost the entire scheme period, and that many consumers – particularly those with weaker credit profiles – would have borrowed at materially higher rates.”
Furthermore, the filing claims that the FCA heard concerns from a former chief economist who sat on its cost benefit analysis panel shortly before publishing the final details of its scheme.
Peter Andrews, who was its chief economist between 2013 and 2017, said: “The fact that one scheme may be cheaper than another does not seem to be an adequate basis for a decision to favour the cheaper scheme when the main objective of the scheme must be consumer protection,” the document claims.
The FCA has said it will defend its motor finance compensation scheme as the best way to resolve a long-running saga and which it says is “fair to consumers and proportionate for firms”.
It has argued that the legal challenges have created uncertainty for consumers and the wider motor finance industry – with payouts that were due to start this year now facing significant delays.
It has also previously tried to get the claim by Consumer Voice thrown out of court by alleging that the group has failed to explain how its legal case is being funded, the nature of the relationship with its solicitors, and potential conflicts of interest.
Consumer Voice responded to say it has “no commercial interest in the outcome of this challenge” and that it considers the challenge to be “in the interests of consumers who stand to lose billions in redress under the scheme as it presently stands”.
The FCA is facing separate legal challenges, on different grounds, from the financial services arms of carmakers Volkswagen and Mercedes-Benz and the car finance arm of French bank Credit Agricole.
The UK’s Upper Tribunal has agreed to hear the legal challenges in December or February next year, with a judgment expected in the following months.
A spokeswoman for the FCA said: “Our scheme is the quickest, fairest and most efficient way to put £7.5 billion back in consumers’ pockets and we are defending it robustly.
“It is unfortunate the challenges have delayed payouts for consumers that were due to begin this year, especially as household bills come under greater pressure.
“We will respond fully to these challenges in court.”
