UK watchdog edges towards motor finance redress scheme

By Huw Jones

LONDON (Reuters) -Britain's financial watchdog said on Tuesday it will give motor finance companies more time to respond to customer complaints about overcharging on commission when buying a car, as it considers a possible redress scheme.

In 2021, the Financial Conduct Authority banned incentives for brokers to increase the interest rate that a customer pays for their motor finance. But many customers have logged complaints claiming compensation for unfair commission arrangements struck prior to the ban.

The FCA said in January that it would look into rising tensions between thousands of consumers and motor finance providers about so-called discretionary commission arrangements or DCAs on financing car purchases.

The watchdog had expected to set out its next steps in September, but on Tuesday said this would now be pushed back to May 2025 as some motor finance firms struggle to come up with data for the watchdog to assess thousands of records spanning 14 years.

"By then, we expect to have analysed the data we have collected from firms and assessed the outcome of the Barclays judicial review of the Financial Ombudsman’s decision to uphold a DCA complaint," the FCA said in a statement.

"Our next steps could involve consulting on a redress scheme. This is why we intend to take the precautionary step of pausing complaint handling until 4 December 2025, as it may take until then to confirm how firms would implement it."

A redress scheme is now "more likely" than when the investigation was started and preferable to allowing uncertainty to continue, the FCA said.

Key providers include Lloyds, Barclays, Close Brothers Group (CBG) and Santander UK.

Royal Bank of Canada (RBC) analysts said that while the courts are likely to be more "corporate friendly" than the FCA, the watchdog is now leaning more towards a redress scheme, with taking no action effectively ruled out.

"In our view, today's announcement lowers the chance of CBG committing to pay a dividend" when it announces results in September, RBC said, adding that consensus estimates for compensation from Lloyds are also likely to rise.

At 0924 GMT, Lloyds' shares were down 1.8%, while CBG's were off 0.4%, largely recovering from an earlier 3% fall.

Lloyds made no further provision against the regulatory probe into overcharging in its H1 results last week, after setting aside 450 million pounds ($578.12 million) to cover possible redress. Analysts have estimated the sector's total compensation bill could reach 16 billion pounds, making it the costliest consumer banking scandal since the faulty sales of payment protection insurance (PPI).

($1 = 0.7784 pounds)

(Additional reporting by Sinead Cruise, editing by Miral Fahmy, Kirsten Donovan)