UK Watchdog Tells US Banks To Prepare for Motor Finance Redress Scheme

The UK's financial watchdog has told banks to prepare for a redress scheme if the Supreme Court rules in favor of a case against motor finance lenders accused of mis-selling car finance.

The Financial Conduct Authority (FCA) has warned banks that if the case is upheld, it will decide within six weeks whether to introduce a redress scheme.

Under the redress scheme, banks would be responsible for determining if customers have been negatively impacted by their failings. If they have, they would need to offer suitable compensation.

The FCA said it has decided on a redress scheme as it would be easier for consumers than filing a complaint. Additionally, fewer consumers would need to rely on claims management companies, allowing them to keep the full amount of any compensation awarded.

The Supreme Court case centers on whether to uphold a Court of Appeal ruling that motor finance brokers and lenders had a fiduciary duty to their customers when arranging motor finance loans, which led to what customers claim was overcharging due to hidden commissions.

The case follows the FCA's investigation into car finance mis-selling in January 2024, focusing on hidden discretionary commission arrangements. These arrangements allowed brokers and dealers to select from a range of interest rates, earning higher commissions for charging higher rates.

The banks with the largest exposures have already set aside funds for potential redress, with Lloyds Bank allocating £1.15 billion ($1.49 billion) and Close Brothers setting aside £165 million ($213 million).