The financial regulator’s proposed redress scheme for car finance mis-selling is “completely impractical”, the trade body for the car finance industry has said.
Stephen Hadrill of the Finance and Leasing Association (FLA) told the BBC there was concern that as the redress scheme could cover loans from as far back as 2007, as firms and customers may no longer have the paperwork for that time.
On Friday, the Supreme Court ruled hidden commissions from lenders to dealers on car loans were not unlawful, meaning millions of motorists will not be able to claim for mis-selling.
However, the judgement left open the possibility of compensation claims for particularly large commissions.
It is not clear yet who will be eligible for redress as the financial watchdog, the Financial Conduct Authority (FCA), has yet to decide what car loans will be considered unfair and how compensation will be calculated.
The FCA will start a consultation in October on who should be eligible for compensation and how much they should get, although it has said individual victims of mis-selling are likely to get less than £950 per deal.
It also “anticipate[s] requiring firms as far as possible to make customers aware they may be eligible and what they may need to do” and that claims “should cover agreements dating back to 2007”.
But speaking to the BBC’s Today programme, Mr Hadrill said: “[There is] a major concern, really, about the redress scheme going back to 2007. I just think that’s completely impractical.
“It’s not just firms that don’t have the details about contracts back then, the customers don’t either.
“And, if we’re going to have to take careful decisions about who gets compensation, who gets redress, and who doesn’t – you need that information.”
Speaking to BBC Breakfast, the head of the FCA, Nikhil Rathi, refused to rule out the possibility that drivers could lose out on compensation because of lost paperwork.
Mr Rathi said some contentious cases could be solved through the courts, but only if one or the other party involved has at least some details.
“Were going to have to work through those issues in the consultation where one or the other party doesn’t have all the details. That is one of the challenges here.”
The FCA has told motorists they do not need to use a claims management company (CMC) or a law firm to take part in any compensation scheme it sets up.
It warned that people signing up to a CMC might end up paying up to 30% in fees out of any compensation they could receive.
The industry is expected to cover the full costs of any potential compensation scheme, including any administrative costs.
The FCA estimates the total cost of such a scheme will cost between £9bn and £18bn.
However, the fact that the Supreme Court sided with finance companies in two out of three crucial test cases on Friday, means the total bill will be a lot less than some had feared.
Lenders – including some of the UK’s biggest banks and specialist motor finance firms – had already set aside more than £2bn for potential payouts ahead of the court ruling.
Shares in banks jumped on Monday morning as investors reacted to the court’s decision. Close Brothers shares surged 16% while Lloyds was up 7%.
In a statement, Lloyds – which has already put aside nearly £1.2bn to cover potential costs – said “if there is any change to the provision it is unlikely to be material in the context of the Group”.
Russ Mould at AJ Bell said the “worst-case scenario, like a particularly ugly pothole, has been swerved”.
“This wasn’t a complete win for the industry, with lenders still potentially on the hook if the relationship with customers meets the threshold of being unfair.”
However, he added: “Essentially, while this issue could still cause some damage, it looks unlikely to be a repeat of the PPI scandal which blighted the banking industry in the 2010s.”