It is clear from the diagnostic work that the FCA’s focus remains on motor finance agreements, where it has observed instances of customer harm through its diagnostic work and on which the Supreme Court gave judgment concerning the application of s.140A, Consumer Credit Act 1974 (CCA) in ‘Johnson’. Necessarily, the FCA is proposing granular definitions relating to scope, including a definition of a ‘motor vehicle’; but many firms will note in the FCA’s statements that the definition of high commission for the purposes of this Scheme is not intended to establish a benchmark for other finance products.

The Scheme is proposed to cover motor finance agreements entered into between 6 April 2007 (when the ‘unfair relationships’ provisions of the CCA, and Financial Ombudsman Service (FOS) jurisdiction for consumer credit, took effect) and 1 November 2024 (i.e. a week after the Court of Appeal judgment in Johnson, following which many lenders and brokers adjusted their systems and processes surrounding commission disclosure and ‘informed consent’).

Lenders will have to assess the application of relevant litigation limitation periods as part of determining whether a case falls within the Scheme. However, given its analysis regarding the extent to which disclosure was inadequate, it does not expect lenders to be “routinely” finding that a case is out of scope and consumers will have the ability to make referrals of lenders’ assessments to the FOS. 

The Scheme applies to any consumer who was resident in the UK at the time of entering into the agreement (although it is recognised that firms may not be able to locate them even after taking reasonable steps, in which case the onus is on them to come forward). 

Following Johnson, the FCA proposes that three broad categories of harm in the motor finance sector will be addressed through the Scheme. These will be known as ‘relevant arrangements’, and they are:

1. Discretionary commission arrangements (DCAs);
2. High commission arrangements; and
3. Tied arrangements.

DCAs will be present where the broker had discretion to set or influence the interest rate or other key pricing terms in a way that increased or reduced the commission they received from the lender.

High commission arrangements are proposed to be set at 35% of the total cost of credit (the TCC) and 10% of the amount financed. In Mr. Johnson’s case, the amount of the commission was over 50% of the TCC, and so it is very likely to be the case that the decision to set a ‘high’ commission arrangement at 35% of the TCC will draw scrutiny by lenders. The rationale for this lies in the data: the FCA asserts that there is ‘statistically significant evidence’ that the relationship between commission and borrowing costs is stronger (i.e. borrowing costs increase by more than £1 for every £1 paid in commission) at the 75th percentile of loans organised by commission as a proportion of the loan amount. For this group, commission is over 33% of the TCC and 10% of the loan amount.

Tied arrangements are those which were a feature of Mr. Johnson’s case; and there are effectively two ways that an arrangement between a motor finance lender and a broker (such as a car dealer) could amount to a tied arrangement: either 

1. The arrangement obliged the broker to introduce the borrower exclusively to a single lender, or
2. (as in Johnson) The arrangement required the broker to give a lender a right of first refusal or similar right of priority.

In any case where there was ‘inadequate disclosure’ of a ‘relevant arrangement’ this will be a ‘scheme case’. What amounts to ‘adequate disclosure’ depends on which ‘relevant arrangement’ is concerned, and importantly adopts – at a very high level – a principles-based approach in some aspects, which as the drafting is currently calibrated, is likely to require very careful construction of redress programmes in order to ensure comprehensiveness and compliance with Scheme requirements, which is capable of being evidenced and demonstrated to the FCA in due course. Further detail on the disclosure required for each type of arrangement is set out in section 3 below.

The FCA expects that around 84% of Scheme cases will involve a DCA, and only 16% will involve only a high commission arrangement or a tied arrangement (or both).

CP25/27 reveals the outcome of the data gathering exercise undertaken by the FCA through its skilled person review and subsequent information requirements. There are some key points:

a. The FCA confirms that, in both its DCA and non-DCA case file review of disclosure of commission amounts ‘the absence of evidence of disclosure is enough to presume that it is highly likely that no disclosure was made’. In 60% of DCA cases reviewed, there was, however, evidence that the customer was informed that commission “may” and/or “would” be received by the broker. Adequate disclosure depends on the type of arrangement (and some arrangements may have more than one feature):

• DCAs: it will be necessary for the lender (who will have the burden of proof) to show that there was disclosure not just of the fact that a commission is paid, but also the nature of the arrangement – specifically, how the broker’s commission was linked to the interest rate charged and that the broker had discretion to select the rate within a range set by the lender.
• High commission amounts: adequate disclosure required lenders to disclose both the fact and the amount of the commission, or information ‘that enabled the consumer to easily work out the amount, such as what the commission represents as a percentage of the loan amount’.
• Tied arrangements: adequate disclosure required the lender ‘tell the consumer about the tied arrangement, and give them sufficient information to understand’ whether it required the broker to introduce customers exclusively to that lender, or give that lender the right of first refusal (for example).

b. There are also a number of observations made concerning lenders’ approach to (or perceived lack of) governance over arrangements with brokers, and broker oversight in connection with disclosure. In the new era of the Consumer Duty, clearly the regulatory framework is significantly different to that which existed throughout much of the relevant period, but manufacturers continuing to grapple with the FCA’s expectations of them with respect to oversight of distributors can gain insights into some key lessons from the consultation paper.

In keeping with certain case law, the FCA has set out a possibility in some ‘rare cases’ for firms to rebut the assumption of unfairness arising from inadequate disclosure, on the grounds of customer sophistication. The FCA has developed a series of criteria to which firms should have regard; including – for example – a borrower having worked in the motor finance sector, having had professional responsibilities which would give them specific knowledge of commission arrangements in the sector, or prior knowledge from having received past, adequate disclosure of such arrangements.

The FCA has proposed a triaged approach to redress calculations, depending on the nature of the harm redressed. 

• For cases which are analogous to ‘Johnson’ – i.e. both ‘high commission arrangements’ and ‘tied arrangements’, the FCA is, broadly speaking, proposing to implement an approach which follows the Supreme Court’s remedy. That is, a ‘refund’ of the commission payable by the lender to the broker, together with compensatory interest (unless the ‘APR adjustment remedy’ would result in higher compensation). At a very high-level, the ‘APR adjustment remedy’ – drawn from its statistical analysis of cases to date – means discounting the APR paid by the customer by 17% (proportionately) to produce a ‘market adjusted APR’, subject to a floor (for DCA cases) at the bottom of the range set by the lender (i.e. the lowest point at which a broker would have been paid commission); which will form the redress figure (together with compensatory interest). 
• For other types of harm – e.g. where both a ‘high commission’ and ‘tied’ arrangement are not present (so not a ‘Johnson’ type case) – which may include where the only factors are that it is a DCA and/or solely a high commission arrangement or tied arrangement, then the FCA has proposed a ‘hybrid’ model – taking a mid-point between the APR adjustment remedy and the commission repayment remedy (again, unless the APR adjustment remedy results in a higher figure).

As some commentators anticipated, the answer is both. The FCA proposes that where customers have complained to lenders already concerning their motor finance agreement, they have effectively opted in, and lenders will be required to assess them under the Scheme. Conversely, for consumers who have not complained, the FCA proposes to require firms to invite them to opt-in. Firms will need to write to consumers who have not complained within 6 months of the Scheme starting. Consumers invited to opt in will need to do so within 6 months of the date of the opt-in letter. If a consumer does not receive an invitation to opt-in, they will need to contact their lender within 1 year of the Scheme start. The FCA expects lenders to make it as easy as possible for consumers to opt-in to the Scheme.

In advance of CP25/27, many in the industry had raised concerns about historic cases and lack of documentation. Here, a two stage approach will be required from lenders in terms of firstly, identifying customers with relevant arrangements, and then considering evidence of disclosure. If the lender does not identify the existence of a relevant arrangement then it must conclude that no unfair relationship exists and no redress is due. However, if a relevant arrangement is identified but evidence of disclosure is not available, the lender must presume disclosure was inadequate and an unfair relationship existed (unless this can be rebutted, for example through evidence of sophistication). 

Firms in scope of the Scheme will be required to comply with its requirements, under new rules to be introduced in CONRED. 

These firms will wish to ensure that – as they design the operational processes and systems to deliver redress (or engage with advisers to support such design and delivery) – they are in compliance with its requirements. As drafted, there are numerous areas of interpretation on which firms may need to form their own judgments. Ensuring that a robust, defensible articulation of the Scheme requirements is used to inform the design of individual firms’ redress programmes will be critical. As set out below, Senior Managers will be required to make attestations to the FCA in this regard and a robust governance process will be required to support these. Firms may also wish to consider testing their interpretations of the Scheme’s requirements with external counsel where appropriate, and engage fulsomely with their trade bodies and the FCA during consultation.

Firms will also note that, where determinations are made that a case is not a ‘scheme case’, customers will have a right to refer that decision to the FOS. The FOS will be required to assess whether the case is, or is not, a Scheme case and whether the firm followed the Scheme in making its determinations; which will add a further dimension of potential uncertainty which firms will wish to mitigate.

The FCA requires firms to take steps now to prepare for the Scheme. Significantly, the FCA has proposed that lenders provide an attestation from a suitable Senior Manager on their preparatory steps for the Scheme, confirming the lender has robust processes, systems, and controls in place to successfully identify the starting population of potentially impacted consumers, to identify firm records and to plug any information gaps. If a lender lacks the necessary records to identify whether there was a relevant arrangement, they must request relevant information from the credit broker. Upon receiving such a request, the credit broker must conduct a thorough search and respond within one month, either by providing the information requested or confirming it does not hold the information. If the broker fails to respond within one month, the lender must issue a follow-up letter, allowing an additional 14 days for a response. If, after completing the steps above, the lender still does not have the necessary records to identify whether there was a relevant arrangement, it must contact the consumer to see if the consumer holds any relevant information. This includes taking all reasonable steps to obtain the information, even where contact details are missing.