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

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.”

Since the Supreme Court judgment on 1 August, the UK has taken a step further towards consumers obtaining compensation where they were the victims of mis-selling.

The Court of Appeal decision from last October had wide reaching implications, with a broad definition for commissions potentially in-scope for a redress scheme. The latest Supreme Court decision has taken a step back from this and rejected two of the three claims on the basis the dealers did not owe a fiduciary duty to consumers, instead having a “commercial interest from start to finish”. This means a lot of commissions will not fall under the scope of a Financial Conduct Authority (FCA) redress scheme, and a lot of consumers won't be able to claim compensation.

However, one of the claims was upheld on the basis of an “unfair relationship” between the consumer and the lender. In this case the commissions were 55% of the total fees paid for financing. As a result, the FCA confirmed on 3 August that they would still consult on a redress scheme, which will take place in October. Therefore, lenders will still need to be financially and operationally prepared for the possibility of paying out substantial amounts to many 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. There are a broad range of factors the Supreme Court considered when determining if the relationship was unfair for other consumers, including:

• whether there was no or minimal disclosure of the commission,
• whether the documents disclose a commercial tie between the dealer and the lender,
• the commercial sophistication of the consumer, and
• the size of the commission compared to the overall amount paid for finance.

These details will be sourced from a combination of both structured data (accounting data and financial records) and unstructured data (emails and documents). Evidence that the commissions or particularly any indication of the value 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.
• Gathering data and documents from other parties, including dealers or customers.
• 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 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 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. During the consultation period, 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, and other challenges expected in implementing a scheme (including data gaps). 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. Firms who have already recognised liabilities may need to revisit them following the Supreme Court decision on 1 August and provide clear justification if the provisions are reduced. The provision 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.

Prepare now for what’s ahead

With 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 to explain to the FCA, and considering proactive ways in which the firm can implement a redress scheme. Firms that act now will be best positioned to navigate the redress scheme efficiently while maintaining business continuity.