Preparing for UK Motor Finance Redress: A Data-Driven Approach

Since last October’s Supreme Court ruling that secret commissions paid by lenders were unlawful, Motor Finance has been a hot topic with Claims Management Companies (CMCs), as seen in their aggressive marketing campaigns:

“Could you be owed £4,000 for mis-sold car finance?”

“No Win No Fee.”

“You could be owed up to £5,000 per car finance agreement.”

But where actually are we on the road to consumers obtaining compensation where they were the victims of mis-selling?

A much-anticipated judgment is due from the Supreme Court on 1 August and is expected to be an important landmark in the developing commission-redress landscape. This judgment will give some clarity on what types of “hidden commissions” are relevant. The UK Financial Conduct Authority (FCA) already banned discretionary commission arrangements in 2021, however there remains an open question about what level of disclosure was sufficient –this is what we expect the Supreme Court to clarify. In line with its 5 June statement, the FCA will confirm its redress scheme decision within six weeks of the Supreme Court ruling.

Lenders need to be financially and operationally prepared for the possibility of paying out substantial amounts to many thousands of their customers. This article provides a roadmap for motor finance institutions to prepare for the coming redress scheme, covering critical data challenges and guidance on engaging with the FCA during the consultation period.

Data Gaps

Lenders (and potentially dealers) need to proactively think about how to gather their data. Whilst this may sound like a straightforward exercise, the biggest issue is likely to be gaps in data and records. The redress scheme could require records from as far back as 2007, whereas standard record retention periods for financial services companies fall well short at five years under FCA rules and seven for tax compliance.

Furthermore, the required data will be wide ranging, including customer details, amounts of commissions paid and contractual terms. This will comprise both structured data (accounting data and financial records) and unstructured data (emails and documents). Evidence that the value of commissions was communicated to the customer will be particularly helpful in reducing the relevant population (e.g., in the contract, speaking notes, or client communications).

Addressing these data gaps in a robust and repeatable way will involve more than simply merging old records. A combination of methods can be used:

• Supplementing structured data from unstructured sources such as contracts, emails, and scanned documents, and converting them into searchable and usable formats.
• Cross-referencing and reconciling disparate data sets, e.g., linking commission payment logs to loan account histories or matching customer details between legacy systems.
• Applying data modelling and machine learning techniques to address unavoidable gaps, such as estimating missing historical loan terms using comparable transactions, or using anomaly detection to flag outlier commissions.
• Implementing auditable data workflows, thoroughly documented for regulatory review and to ensure repeatability as more information emerges.

Consolidating and Segmenting Data

Firms will be best placed to proceed by consolidating this data into one database specifically designed for redress analysis. Firms can then segment the customer groups based on product types, commission types, or levels of disclosure, thereby isolating customers who are subject to the redress scheme. This will combine econometric analysis, to strategise the approach and triage claims, and empirical analysis of transactional data. Firms can then proactively map and validate commission arrangements and payment histories with customers, even before final guidance is issued by the Supreme Court and FCA.

Ensuring the database acts as a single, consistent source of information means:

• Bringing together records from different systems i.e. finance platforms, Customer Relationship Management (CRM) tools, and document archives – allowing each customer and loan to be viewed as one complete record.
• Standardising the data (e.g. dates, transactions) to enable quick and reliable analysis.
• Creating unique IDs for customers and loans to match records even across disconnected systems.

This approach gives a clear, auditable foundation for a redress model to quantify both the firm and individual customer exposure, as the FCA will expect. Calculating customer specific exposure will also facilitate quick generation of tailored customer letters later on as part of the remediation process.

Engaging with the FCA and Ability to Pay

The FCA has said that any redress scheme is intended to balance market integrity with adequate consumer redress. When announced, the scheme is expected to include a consultation period (likely 6-12 weeks) where motor finance firms can provide input on the impact to their business and ability to continue trading.

This will be the critical time for companies to actively engage the FCA on what they can afford, especially if there is a risk that they may go out of business. The FCA has said they will take this consultation into account, although the likely impact remains unclear.

In January 2024, the FCA instructed firms to undertake a forward-looking assessment of whether the firm’s financial resources were adequate for the potential redress liabilities, proportionate to the scale and complexity of the entity . However, firms’ positions may have changed since this assessment was done. Companies should engage with the FCA again and not take what was already provided as “good enough”.

Firms will also need to quantify potential payouts in order to manage the financial impact in advance. This involves two challenges: recognising provisions and liabilities in financial statements in line with often complex accounting standards, and managing the actual financial outflows. Both require defensible and auditable calculations. The issue will be more nuanced for regulated entities (e.g., banks and the financial arms of car manufacturers), but it is nonetheless an issue for all motor finance firms.

Ability to pay analysis will include:

• Developing and modelling scenarios to assess the scale of potential redress liabilities, in line with the steps described above.
• Modelling capital and liquidity implications across various time horizons, which will include assessing ability to pay.
• Preparing Board and regulatory communications, including provision justifications.

Based on our previous experience of supporting ability to pay negotiations with various authorities, credibility is critical to successfully arguing where there is an inability to pay. An ability to pay study should be objective, quantitative and thorough, and a company must cooperate with the authorities. The study will involve looking at the company’s going concern assessment, identifying worst case scenarios using modelling, and mitigating these scenarios by considering refinancing programs and sources of funds (for example, what borrowing would be possible at reasonable rates) to maintain medium to long term viability.

The decision on how far back the redress scheme will extend will dramatically affect the size of the potential outlay. Similarly, the Supreme Court’s decision on whether the redress scheme just applies to discretionary commission arrangements or to a wider array of “hidden” commissions may significantly impact the result for firms.

Prepare now for what’s ahead

With the Supreme Court decision imminent and potential liabilities stretching back to 2007, the window for preparation is rapidly closing. Success will depend on three critical factors: reconstructing historical data and addressing gaps, building robust and defensible exposure calculations, and effectively demonstrating ability to pay during FCA consultations. Firms that act now will be best positioned to navigate the redress scheme efficiently while maintaining business continuity.