Planned payouts for people mis-sold a car loan are likely to be delayed until at least 2027, as the UK watchdog faces legal battles which threaten to derail its compensation scheme.
The Financial Conduct Authority (FCA) said it has already spent more than £20 million developing the plans and that further costs lie ahead.
The regulator is facing four separate legal challenges from companies who are not happy with its plans for redress, which involve paying out an average of £829 for an estimated 12.1 million eligible car finance agreements.
These agreements involved so-called discretionary commission arrangements – widely known as “hidden” commission – which meant motorists did not get a fair deal when they took out a loan on their car, according to the FCA.
Payments through the scheme were meant to start this year but are now being delayed.
Sarah Pritchard, deputy chief executive of the FCA, told MPs at the Treasury Select Committee: “I want to be straightforward that the legal challenge will add delay and extra costs to the scheme as a whole.
“If the scheme goes ahead, the delay, we believe, will result in payments not before 2027.”
The financial services arms of carmakers Volkswagen and Mercedes-Benz and the car finance arm of French bank Credit Agricole, as well as Consumer Voice, a group representing consumers, are asking the courts to quash the scheme, arguing the rules are unlawful.
No UK bank has decided to challenge the scheme, which is set to cost the industry £9.1 billion.
In a letter to the committee, FCA chief executive Nikhil Rathi warned that the scheme could be “struck down in whole or part” as a result of the legal challenges, and it would need to then decide what to do next so that people still get compensation they are owed.
This could involve switching to a complaints-led approach to resolving individual claims, which he estimates would cost lenders £6 billion more and take three years.
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