Customer redress may signal the end of the road for some motor finance lenders

The Supreme Court is expected to rule that motor finance companies must compensate consumers who unknowingly paid discretionary commission on motor vehicle purchases. Recent attempts at government intervention have been blocked, meaning it’s highly likely lenders will need to pay compensation to affected customers. Leading audit, tax and consulting firm 91探花 warns the amount of redress, which runs into billions, could force some motor finance firms to fold. 

Millions of consumers who were not told commission was paid as part of a car finance deal could be in line for a payout, as finance deals on new and used cars from 6 April 2007 to 28 January 2021 are potentially in scope for redress. Data from Moody’s suggests the motor finance industry could face redress of up to £30bn. 

Zoe Morton, risk assurance director, 91探花 said: “This ruling could be devastating for motor finance lenders, and has far-reaching implications for other companies that have commission structures in place, including insurance and mortgage brokers, financial advisers and consumer credit brokers. The ruling inevitably puts commission payments generally under the microscope, so now is the time for businesses that operate commission structures to ensure they are operating in line with Consumer Duty principles of clear and transparent communication. Lenders should also review their wind down plans and ensure that, should the need to pay redress arise, they are in the best possible position to handle the fall out.”

The onus is increasingly on firms to demonstrate they are acting in the best interests of customers, in line with Consumer Duty principles of prioritising consumer needs, mitigating consumer harm and enhancing transparency. 

91探花 recommends firms take the following steps:

• Identify all commission structures in place. 
• Identify all customer cohorts who took out a product during the relevant period.
• Ensure you have all key data points such as name and address, product type, terms, APR, commission paid, defaults etc.
• Identify which customers may be in scope for potential redress.
• Model the range of potential claims volumes and redress payments, linking this to operational processes and capacity to handle these.
• Assess the financial impact of this on the firms’ ability to continue trading and monitor early warning indicators.
• Ensure wind down plans are robust and fit for purpose in the event a wind down is necessary.

Zoe Morton concludes: “Redress for motor finance firms may be just the tip of the iceberg, so it’s important for all firms that have commission payment structures in place to consider the likelihood of an increase in customer complaints, and put measures in place to meet demand.”