This is a follow-up to Woodhurst’s November 2024 thought leadership: Court of appeal announcement shakes up the specialist lender market.
Following a three-day hearing in April, the Supreme Court is currently considering whether to uphold the Court of Appeal’s ruling that it is unlawful for dealers acting as credit brokers to receive commission from lenders without the customer’s informed consent. If upheld, the ruling will reinforce the FCA’s earlier ban on Discretionary Commission Arrangements (DCAs), introduced in January 2021 amid concerns that such agreements were rarely disclosed and created a clear conflict of interest between broker and borrower.
Although a final ruling may take several more months, now is a critical time for lenders to begin preparing for the potential outcomes. The FCA has already signalled that, should the Supreme Court uphold the ruling and confirm widespread consumer detriment, it is prepared to introduce a formal redress scheme. This scheme is already being unofficially dubbed “PPI 2.0” and is expected to require lenders to proactively compensate affected consumers, without relying on individual complaints. This would also significantly reduce the role of claims management firms.
What’s next for the lenders?
Specialist lenders involved in motor finance now face the prospect of one of the most complex and high-stakes remediation exercises in recent years. Industry estimates suggest the potential redress bill is estimated to be between £30-44bn. In anticipation, many firms have provisioned for a possible ruling against the industry.
But the financial burden is only part of the challenge. Lenders will need to review historical motor finance agreements, potentially dating back to 2007, to determine which contracts included DCAs, and whether commission structures were properly disclosed and consented to. In many cases, key data will be incomplete, requiring lenders to infer impacts using proxies, averages or standard assumptions.
If redress is required, affected loans would need to be assessed, and undue interest repaid to customers. Refunds would likely include:
- The excess interest paid (i.e. the difference between a fair market rate and the inflated DCA rate).
- A compensatory interest payment – potentially at 8% simple interest per annum, as seen in the PPI redress scheme.
This would only mark the beginning. Lenders would need to establish dedicated programme teams, customer contact centres, and oversight mechanisms to manage queries, communications, and ongoing regulatory engagement – all while maintaining operational continuity.
Doing it right, first time
In a potential redress scheme of this scale, speed alone is not the answer. The priority for lenders should be getting it right first time. As the PPI redress showed, a misstep, whether in calculation methodology, customer communication, or operational delivery, can lead to:
- Costly second reviews and recalculations
- Regulatory penalties or supervisory intervention
- Reputational harm and erosion of customer trust
The first step will be understanding your historical data and calculating redress with accuracy and transparency. In some instances, where original commission details are incomplete, firms will need to adopt standardised methodologies for estimation – a process that must stand up to regulatory scrutiny and remain fair to customers.
During the PPI remediation, our consultants supported leading banks by developing independent redress models that could be benchmarked against internal calculations. These models factored in loan specifics (e.g. principal, term, interest rate, commission structure) and computed redress in a way that was fair, reproducible, and auditable.
The approach was firstly identifying the relevant data sources within the client organisation and then developing innovative methods for efficiently extracting this data. Where data sources were incomplete or low quality, our consultants provided advice on regeneration exercises that factored in allowable assumptions. This approach provides a dual benefit: confidence for boards that they are neither underpaying nor overpaying, and assurance for the regulator, from an independent third party, that all reasonable steps have been taken to deliver fair outcomes.
Operationalising Redress with Care and Clarity
Once calculations are finalised, the focus must shift to customer execution. This means designing a clear, sensitive remediation journey: proactively reaching out to affected customers, clearly explaining the issue, and facilitating a seamless transfer of funds.
Customer communications should be factual, transparent, and easy to understand. Many recipients will be unaware they were impacted and may initially respond with confusion or concern. Lenders will also need to track every engagement and document their end-to-end adherence to FCA expectations, creating a full audit trail.
To avoid disrupting business-as-usual, this effort should be ring-fenced and resourced separately. Dedicated teams can focus solely on delivery while the core business continues to operate effectively, ensuring the business successfully navigates this challenge and comes out stronger on the other side.
To discuss your organisation’s plans for dealing with the motor finance redress scheme, get in touch with Woodhurst’s inhouse data expert Sam at sam.spacey@woodhurst.com or contact us directly on LinkedIn.
