When customers took out loans to buy cars, the dealership arranging that loan often received a commission payment from the lender. Customers were not properly told by these dealerships about this happening. That lack of transparency meant some buyers unknowingly paid higher interest rates than they needed to, which meant that the dealership could pocket a bonus through the commission received from lenders.
The regulator overseeing this, the Financial Conduct Authority (FCA), wants to force lenders to pay compensation and reckons this compensation bill could hit over £9 billion. However, several carmakers like Volkswagen are taking the FCA to court on the basis that the compensation scheme is unlawful. This has meant the compensation scheme has hit a roadblock.
Analysis
This case represents a clash between two opposing legal positions: the regulator that wants quick compensation for the customers that were misled and deserve to be paid, against the lenders that want to avoid being roped into a poorly designed compensation scheme. The biggest victims of this standoff are the customers waiting on their payments.
What does this mean for the sector?
- Lenders/carmakers are stuck setting aside huge amounts of money in anticipation of a compensation bill, which means this same money cannot be used for business activity
- The court challenge could derail or completely get rid of compensation for millions of customers that deserve to see money
- Any business model built around hidden commissions, not just in car finance, might now face closer regulatory attention
How to use this in applications
Application
Disputes and litigation teams would be representing carmakers like Volkswagen and Mercedes-Benz in their challenge against the FCA at court, building the argument that the current scheme is not fair or properly targeted. Also within disputes, class action teams at law firms might act for the customers caught in the middle, pushing to ensure that compensation actually reaches the people it is meant to.
Financial regulation teams would guide lenders through exactly what is expected of them under the FCA's proposals while the legal uncertainty continues.
Corporate advisory teams would help carmakers' finance divisions work out sensible amounts for the companies to set aside in anticipation of any future compensation that may be ordered by the courts.
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