Motor finance redress: UK banks face additional £40mn in postage costs

UK banks could be forced to pay up to £40mn in postage costs to consumers affected by the motor finance scheme, a figure not included by the Financial Conduct Authority in its cost expectations for the scheme’s implementation.

In a draft of the rules for motor finance compensation released in October last year, the FCA said lenders must contact affected customers by “recorded delivery” post. It must also give the receiver the ability to respond without charge, for example with a pre-paid envelope inside.

The FCA has said it expects 14mn schemes to be subject to payouts as a result of the compensation scheme. The cheapest “signed for” service by the Royal Mail costs £2.77, meaning UK banks could be on the hook for up to £38.9mn in postage costs for sending the letters.

This would be the cost if one letter was sent out per agreement, but many consumers took out multiple agreements with one or more banks during the period the scheme covers. It is unclear to what extent banks would be able to combine correspondence for multiple agreements with one customer, because this depends on a number of factors including whether or not the customer has an existing complaint lodged with the lender, and what the timeframe is for contacting customers.

“In designing a potential scheme, we want to ensure the risk of fraudsters exploiting consumers is mitigated. That’s why we proposed recorded delivery as an option. We are reviewing responses to our consultation and considering ideas to improve the scheme,” the FCA said.

The motor finance compensation scheme relates to increasing consumer complaints about car finance agreements, which led to a Supreme Court case last year in which part of a claim against banks was upheld. The court ruled that although dealers did not have a fiduciary duty towards customers for whom they arranged motor finance deals — greatly narrowing the potential scope of compensation — it did agree with one claimant who argued that the relationship between himself and the lender was unfair.

The ruling, heard in August, led to a surge in UK bank share prices because lenders were shielded from the worst of the compensation. The FCA quickly notified the market that it intended to introduce a compensation scheme that aims to make the first payments to customers next year.

The FCA said its initial proposal for the scheme could costs banks up to £8.2bn in compensation as well as £2.8bn in implementation costs, though this does not include postage costs. Some 44 per cent of the total agreements signed between 2007 and 2024 are expected to qualify for compensation, which the regulator estimates will be an average of £700 per claimant.

The regulator has previously said it is aiming to make the final rules as cost-effective and efficient as possible for all involved. It expects to confirm the details of the scheme in February or March this year, with some payouts beginning before the end of the year.

UK lenders have criticised the scheme, saying it is too generous to consumers and that the methodology used by the FCA to calculate compensation is excessive and insufficiently tied to customer losses.

In November, Santander UK chief executive Mike Regnier urged the government to review the compensation scheme, which in its current form he said could “significantly impact jobs, growth and the broader UK economy”. 

In December, the FCA’s CEO signalled that the regulator could soften the scheme in favour of banks. Speaking at the FT and The Banker’s Global Banking Summit, Nikhil Rathi said the City regulator could “adjust and refine” its initial proposals following a consultation with the industry. When asked if there was room to move from the initial £11bn plan, Rathi said: “Absolutely, yes.”