Nikhil Rathi, Stephen Braviner Roman and Sheree Howard.

Q1 The Chair: Welcome to the second part of today’s meeting, which is an oral evidence session scrutinising the work of the FCA, with particular reference to its approach to motor finance compensation. Thank you, Nikhil Rathi, Stephen Braviner Roman and Sheree Howard, for attending.

The session is open to the public, is broadcast live and is subsequently accessible via the parliamentary website. As the session is not linked to an ongoing inquiry, although it may turn out that it turns into one, it is a requirement that members of the committee declare their relevant interests orally when speaking for the first time, so that they are on the record.

A verbatim transcript will be taken and will be put on the parliamentary website. A few days after this session, you will be sent a copy of the transcript to check it for accuracy, and it would be helpful if you could advise us of any corrections as quickly as possible. If, after this evidence session, you wish to clarify or amplify any points made during your evidence, or have any additional points to make, you are welcome to submit supplementary written evidence to us.

Perhaps I could begin by asking the first question and making an observation. When the Supreme Court made its judgment, I thought that everything was remarkably clear and simple, but you seem to have made it considerably more complicated and costly. The FCA’s scheme proposes that lenders cover loans dating back to 2007, while acknowledging that lenders are not required to hold records for more than six years. Does that not impose an unreasonable and disproportionate burden on lenders, as well as exacerbate the retrospective premium that our report on growth and competitiveness criticised? How are lenders meant to cope with this administrative burden?

You state that nearly half the agreements dating back to 2007 were unfair to the consumer, yet you have had 11 years since taking responsibility for motor finance in 2014 to uncover this. Why are you reaching this conclusion only now? Why did your 2017 review of the motor finance sector, which expressly considered conflicts of interest arising from agreements between lenders and dealers, and the adequacy of disclosure to consumers, not identify the issues then? Have you been asleep at the switch?

Nikhil Rathi: Thank you, Lord Forsyth, for the invitation, and also for inviting Sheree and Stephen to give evidence this morning. As you said, the Supreme Court issued its judgment on 1 August. Within 48 hours of that judgment, we set out our next steps, which were that we would consult on an industry-wide redress scheme by early October. We launched that consultation last week. The Supreme Court judgment, alongside the High Court judgment in Clydesdale, which had come a few months earlier, are the two judgments that give us the legal clarity that we need to move forward now and publish the detailed work that we have been undertaking since the start of 2024 when we paused complaints, which sets out the issues around disclosure practices in motor finance.

The Chair: You can assume that we know that. You sent us about 1,000 pages of material, which we have waded through, and I am sure that colleagues are familiar with the background. I would be grateful if you could answer my questions.

Nikhil Rathi: What we have concluded is that many firms broke the law in force and the rules at the time. These liabilities exist no matter what, and they exist back to 2007, because that is the way in which the statute works, including the statute of limitations. We had an exchange of correspondence with you on that. We believe that a scheme is going to be the most orderly and efficient way of addressing those liabilities and bringing this to an orderly and efficient close. We have had complaints going back to 2007 on pause now since January 2024. One way or the other, we are going to have to deal with those. Probably several hundred thousand have built up in the system. There may be many more.

The Chair: Nikhil, can you answer my questions, which were about the FCA’s conduct and competence in dealing with this matter?

Nikhil Rathi: You asked a number of questions, Lord Chair. One was about 2007. That is prior to my time, but what I can say—and Sheree may want to add a bit about the history here—is that the FCA took over regulation of consumer credit in 2014. Around 50,000 firms came into FCA regulation at that time. The FCA, at that time, set out a range of priorities around high‑cost credit, overdrafts and other areas of work that it focused on. It turned to motor finance in its 2017 plan.

In 2019, after work had been published in 2018, we concluded the study on that, which was the basis for banning discretionary commissions in 2021. There was a short pause there because, during the pandemic, a lot of policy work was put on hold during 2020.

In 2019, problematic disclosure practices were identified—and that is in the reports—and firms were invited to address where they had identified problematic disclosure practices. As complaints started coming in, though, firms were rejecting 99% of those complaints, and that was, ultimately, what was causing the build-up at the FOS.

Furthermore, there is a statutory basis here. There were conflicting views coming through the county courts on what constitutes an unfair relationship. As you say, you are familiar with the history. That went through to the Court of Appeal and, ultimately, the Supreme Court, and we have clarity now.

Lord Grabiner: Lord Chairman, I have nothing to disclose.

The Chair: I should have said that I have nothing to disclose as well.

Q2 Lord Grabiner: I am not going to ask you a compendium question; I have separate questions. First of all, as a result of the Supreme Court decision that we have already had reference to, the remaining area for possible compensation is now limited to claims under the Consumer Credit Act. That is right, is it not?

Nikhil Rathi: That is right. Our scheme is proposed under the Consumer Credit Act.

Lord Grabiner: I understand, but that is the only bit left, because, prior to the Supreme Court judgment, there was a risk that the liabilities would be much more extreme—it is a yes or no.

Nikhil Rathi: Yes.

Lord Grabiner: Next, can I ask you this? You have opened a consultation on a proposed industry-wide redress scheme that is designed to compensate motor finance consumers or customers.

Nikhil Rathi: Yes.

Lord Grabiner: The scheme as drafted would, if put into effect, go back 18 years.

Nikhil Rathi: It would go back to 2007, at the point where we believe claims are legally valid, yes.

Lord Grabiner: You have a consultation period currently running, which is due to end on 18 November.

Nikhil Rathi: That is right.

Lord Grabiner: I just want to focus on the 18-year point. In your letter to our Chair, Lord Forsyth, you said that, in that 18-year period, there were widespread failures by dealers/brokers “to adequately disclose”—and I will resist the temptation to be irritated about the split infinitive, but that is what your letter said—the existence and nature of commission arrangements between the finance companies and the dealers. Elsewhere in the letter, you speak of “inadequate disclosure”. That is the way that it is put in your letter. Is that right?

Nikhil Rathi: That is what the letter says, yes.

Lord Grabiner: That is also the way that it is put in the opinion that you obtained in support of the position that you are now advancing.

Nikhil Rathi: That is right, yes.

Lord Grabiner: Going back 18 years would, of course, be very attractive business for what we pleasingly call claims management companies, would it not?

Nikhil Rathi: Claims management companies’ business model rests on pursuing claims as broadly as they can, and we have taken some firm action around that.

Lord Grabiner: What they do is secure potential claimants, and then pick up for themselves a significant percentage of the recovered compensation as their compensation. That is how it works, is it not?

Nikhil Rathi: Yes, up to 30%. We have been concerned about some misleading claims that they have been making, and we are taking action.

Lord Grabiner: The consumer, of course, is not obliged to use their services, but they do advertise heavily. It is impossible to turn on Times Radio or Classic FM at the moment without hearing these advertisements. I am sure that you are familiar with them. Although the consumer is not obliged to use their services, there is no upfront cost to the consumer, is there?

Nikhil Rathi: There are claims management companies, and there are law firms. Some 90% of the complaints that have come in so far that have been professionally represented have been from law firms, supervised by the Solicitors Regulation Authority, and the remainder from claims management companies, supervised by us. Generally speaking, they advertise on a no-win, no-fee basis. I cannot say 100% that none of them charges anything up front.

Lord Grabiner: No, but I mean broadly speaking.

Nikhil Rathi: Broadly speaking, that is their model.

Lord Grabiner: The business model involves saying, “You do not have to pay me anything. I will take what I am going to be paid out of what we recover for you”.

Nikhil Rathi: Yes.

Lord Grabiner: Also, given the length of time that we are discussing, if we go back 18 years, it is very unlikely that consumers will have retained the relevant documentation, so, again, it will be much more attractive for the consumer to go to the claims companies, which are sometimes unfairly called “ambulance chasers”.

Nikhil Rathi: We published consumer research in the pack of documents that we published last week. There is a surprisingly large number of consumers who say that they have held on to documents going back quite some time. There are different reasons why people may wish to use a law firm or a claims management company. It is not going to be automatically attractive for everybody, although we have been very clear throughout that there is no need to do so, and we have launched our own advertising campaign to make sure that people understand that they do not need to use these firms.

Lord Grabiner: All I am suggesting is that, in all probability, being human beings, they are quite likely to be attracted by the approach made by such a company rather than relying upon their own devices to make the claim.

Stephen Braviner Roman: If I may, that is true. There is a factual and counterfactual world that we are dealing with. If we take the scheme out of the equation, that is exactly the case. A consumer would be faced with the option of bringing a case to the county court, which is where these cases go, as you know, as fast-track claims. If they did not have any material, it would be a very easy option for them to click on to a claims management company and let them do the running and do what they can to find the material.

Lord Grabiner: Your point is that the scheme will deter people from doing that, and they will come through the scheme. That is your point.

Stephen Braviner Roman: Yes, exactly, because we put the onus in the scheme on to the firm to do that running.

Lord Grabiner: I understand. The law is well established that the limitation period for claims related to unfair relationships under the Consumer Credit Act is six years, plus the unexpired period of the governing finance agreement. That is the end of the particular credit agreement in place between the individual consumer and the finance company. The authority for that, which I am sure you are aware of, because we have mentioned it in the correspondence, is a case called Smith v Royal Bank of Scotland in 2023. You are familiar with that, I assume.

Stephen Braviner Roman: Yes, and the caveat to that.

Lord Grabiner: By “caveat”, you mean the added-on period.

Stephen Braviner Roman: By that, I mean if there is deliberate concealment.

Lord Grabiner: We will come to that. Typically, if you added on to the six years a typical unexpired period of a consumer financing agreement, you might get to nine years, or maybe 10 at most. Is that fair? You are nodding.

Nikhil Rathi: It is only a small number of the overall agreements here. There is a separate statute of limitation in Scotland, which does not apply in the same way. Of course, we cannot put anything into a scheme that would not be a valid claim.

Lord Grabiner: We will come to that.

Nikhil Rathi: We can only put things in that are valid.

Lord Grabiner: You are anticipating further questions. Let us come to that, shall we? The starting point is that, if you want to make a claim under the Consumer Credit Act, you have six years in which to make your claim, plus any unexpired portion of the finance contract. In theory, you might get a limitation period of maybe nine or 10 years at most. We are agreed about that.

Stephen Braviner Roman: Yes, subject to the important caveat.

Lord Grabiner: The law is also clear—and I am coming to that now, and this is in the Limitation Act of 1980—that, if the consumer can prove “deliberate concealment”, which is roughly equivalent to fraud, the limitation period will not start to run until the concealed facts are known to the consumer, or the consumer could, with reasonable diligence, have discovered the facts. That is the position, is it not?

Nikhil Rathi: Yes.

Lord Grabiner: In an appropriate case, the six-year rule would fall away, but the burden of proof is on the consumer. That is an important point. That is correct as well, is it not?

Nikhil Rathi: Yes.

Lord Grabiner: If you are a consumer complaining that you have been the victim of deliberate concealment, you have to plead and prove that and, if you are successful, the limitation period of six years will fall away. We are agreed. The scheme that you have proposed has inbuilt into it the unstated assumption that there was deliberate concealment in all the cases going back 18 years. That is the kernel of the point that I am concerned with. Do you understand my question?

Stephen Braviner Roman: May I answer it?

Lord Grabiner: Do you understand my question first?

Stephen Braviner Roman: I understand your question.

Lord Grabiner: What is the answer?

Stephen Braviner Roman: The answer is that that is an incorrect assumption. The scheme is predicated on, as Mr Rathi has said, first, as a matter of law, we cannot bring into the scheme anything that is properly, as a matter of law excluded, applying the principles of law that you have carefully set out. We are not seeking to bring into the scheme anything that is properly excluded as a matter of law. We do have some presumptions in the scheme in relation to deliberate concealment, which is based upon case law, and Potter in particular. In cases of inadequate disclosure of the sort that we have seen typically in the industry, commission may be payable, which is very comparable to the facts in the Potter case.

Lord Grabiner: Do you mean the Canada Square case?

Stephen Braviner Roman: Yes, exactly. The disclosures of the sort that were standard, typical practice, whereby commission may be payable, are not sufficient to put the consumer on sufficient notice to mean that, with due diligence, they should have found out the key facts that we are concerned with in these cases.

There may be other cases in the cohort of agreements going back to 2007 where additional disclosures were made, where particular facts were disclosed to the consumer, where facts were disclosed to the consumer after the point of the transaction, but we are not bringing those in automatically. That is for the firm to prove.

Lord Grabiner: You are telling the world that people are going to have a scheme that is going to go back 18 years. Are you saying that it is perfectly possible that a very large number of those people will not have a claim at all because they will not be able to demonstrate deliberate concealment?

Stephen Braviner Roman: I am saying that the same number of people who will not have a claim under the courts will not have a claim under our scheme. I cannot tell you how large a proportion that is of the cases.

Lord Grabiner: So why on earth are you suggesting that people should go back 18 years? That is the prima facie position. Everybody reading what we have read about your proposed strategy will think that, prima facie, you will be entitled to go back 18 years. The consumer in the street is entitled to say, “I did this deal in 2007. I am going to pick up some nice compensation”. That is the thrust of the scheme, is it not?

Stephen Braviner Roman: The thrust of the scheme is that there is a problem created in the world that we are seeking to deal with. The problem that the scheme is addressing is that, going back to 2007, there was a series of laws in place that have not been complied with. Those laws, prima facie, give rise to a cause of action for individuals to pursue through the courts or through the FOS—the Financial Ombudsman Service.

It is absolutely correct to say that some of those cases will be time barred as a matter of law. The question for us is what the best way is for those potentially millions of cases to be dealt with. Is it to leave it to individuals, CMCs, the courts and the Financial Ombudsman Service to approach them, to whip up large numbers and to overload the court system? About 100,000 small claims cases go through the courts each year. We are talking about millions of cases.

Lord Grabiner: I appreciate that, but would it not be more accurate, then, for your scheme to be suggesting that people have claims and, if they can, in the appropriate cases, demonstrate deliberate concealment, they will have a longer period of time in which to make the claim? You have started from a completely different position. You have started going back 18 years. You have not started six years plus a bit.

Nikhil Rathi: We have been looking at the disclosure practices with thorough investigation, using a skilled person, and we have disclosed transparently what we have found, which is that there were poor disclosure practices, and probably worse going back in time. Therefore, in the interests of transparency, if that is what we found, that is what we are publishing as the basis and the evidence base for our scheme. It would not be appropriate for us not to share that evidence. We are sharing it openly. There is a very detailed diagnostic report alongside the consultation.

As Stephen says, there is a practical issue. We paused complaints since 2007. The industry was keen for us to do so, because the system was building up tens of thousands of complaints. We have paused these complaints from hundreds of thousands of consumers. We now need to decide what to do. We either find a way to put them in a scheme, and they can be dealt with in an orderly, efficient and consistent way, or we go back to where we were at the start of 2024, and all of these go through firms, the Financial Ombudsman Service and the courts, with the potential for inconsistent and uncertain outcomes.

Lord Grabiner: Can I ask you this? You have suggested a figure for what might be the possible exposure to the finance companies or the banks. Is that a figure presumed on the basis of a deliberate concealment outcome? How have you calculated that figure?

Sheree Howard: We were quite clear that we have not allowed for what we are saying is a rebuttable presumption. If the lender can prove that they did not conceal the information, and it was disclosed adequately, they would be able to—

Lord Grabiner: On what basis have you done your own calculation of the anticipated liability here? A figure of £11 billion is the one that was suggested.

Sheree Howard: Yes, including claims handling. It is £8.2 billion based on our assumption of taking—

Lord Grabiner: How has that figure been arrived at?

Sheree Howard: That is assuming that there will not be evidence of disclosure, because, as we have said, our analysis of an examination of consumer files has not evidenced adequate disclosure.

Lord Grabiner: So the assumption in your proposed plan is that all the people who claim will be able to recover on a deliberate concealment basis.

Stephen Braviner Roman: There is a difference. The figures that you have quoted are absolutely right. It is £8.2 billion if there is an 85% take‑up, and we have set out in our consultation how we get there. Those figures are, as it were, a top-end estimate of nobody being able to prove that it was zero APR or that it is out of time. It is very difficult for us to make any sensible estimate, so that figure assumes an 85% take-up and nobody being out of time, but, as you are implying, some of those people will be out of time.

Lord Grabiner: For completeness, let us have a look at the case to which you referred a few minutes ago, which is Canada Square Operations v Potter, also in 2023. You rely upon that in support of your contention that it is entirely fair to go back 18 years. Is that right?

Stephen Braviner Roman: We rely upon that for the contention that a partial disclosure is not sufficient to—

Lord Grabiner: We understand that. This is equivalent to a fraud case. Let us just give you the brief key facts. First of all, that was a PPI case, was it not?

Stephen Braviner Roman: Yes.

Lord Grabiner: Was it? Can you not remember, or do you know?

Stephen Braviner Roman: Yes, but I do not think that that is a key determining factor.

Lord Grabiner: It was a PPI case. The analogy is good.

Stephen Braviner Roman: Yes.

Lord Grabiner: In that case, the credit contract stated that the payment protection premium was £3,834.24. The sum paid by the defendant—the broker in the middle—to the insurer was not £3,834; it was £182.50, which is more than 95% of the supposed premium. The difference was the defendant’s commission. That rings a bell with you. You have read the case.

Stephen Braviner Roman: I have read the case, thank you.

Lord Grabiner: The court held in that case that that was a perfect example of a deliberate concealment from the consumer. We also know, because I have looked at the case, that the defendant did not contend otherwise, which is not surprising, because the figures were a killer from his perspective. It was obvious that he had deliberately and fraudulently, I would respectfully suggest, concealed this from the consumer. That is what we call a very clear case, is it not?

Stephen Braviner Roman: Yes. I would distinguish, though, between the scale of the commission and the question of concealment, and the matters done to disclose the—

Lord Grabiner: You might, but the court did not. The court took the view that, because there was such a dramatic discrepancy, it was obvious that the dealer had deliberately concealed that information from the consumer.

Stephen Braviner Roman: The court imputed that motive.

Lord Grabiner: Yes, I know, but it is obvious that that was correct, was it not?

Stephen Braviner Roman: With respect, that is still different from the question of whether there was concealment. That goes to the motive—to the deliberation or to the intentionality.

Lord Grabiner: The court concluded that that was a case of deliberate concealment and, for that reason, the six-year limitation period fell away. That is the point.

Stephen Braviner Roman: Yes.

Lord Grabiner: I have a couple of concerns, as you may already have detected, about the 18-year look-back. First of all, in many cases, there must have been no deliberate concealment at all. That must surely be right.

Stephen Braviner Roman: Yes, as a matter of sensible hypothesis.

Lord Grabiner: One of the reasons why I make that point is because, in your own FCA rules and principles, under CONC 4.5.4R, which I am sure you are familiar with, the dealer has been obliged since April 2014 to disclose the likely or known amount of commission and “if the consumer or customer requests it”. You will have a case where, because the matter never even arose in conversation, which is a possibility, or even if it did, there was no question put to the dealer, the dealer is entitled to say to himself, “I am not going to discuss the commission because, under the FCA rules, I have no obligation to do so”. So in a case such as that, for example, it is obvious that that would not be a case of deliberate concealment, would it?

Stephen Braviner Roman: Can I refer you to a previous rule? 4.5.3 of CONC is the rule above the specific rule that you are referring to in the way that it is structured. The obligation on the broker is to disclose the existence and nature of any commission that would be such as to impact upon their impartiality or be a material consideration for the consumer.

Lord Grabiner: I understand. How does that line up with your own provision that says that you reveal it if the customer requests it?

Stephen Braviner Roman: With respect, the Supreme Court, in Hopcraft, looked at these rules and said that failure to disclose a high commission breaches 4.5.3, because it is clear that that was something that should have triggered the impartiality or material consideration for the consumer.

Lord Grabiner: The short point is that it is open to the individual to say, “I did not conceal anything. I did not do it deliberately or otherwise. The customer never raised the point with me. I followed the FCA rules to the letter”. Just assume that that is the factual scenario. In such a case, it would not be possible to go back beyond the six years, would it?

Nikhil Rathi: If there had been adequate disclosure, there is no liability. There are two points here. One is non-discretionary commissions, whereby the Supreme Court narrowed considerably the scope for any liability, which was a very significant development. It overturned the Court of Appeal on that point, and we made submissions that the Court of Appeal had gone too far. There is then disclosure of the nature of the commission arrangement, and that is where I would also refer you to the High Court and the Clydesdale case, which was very clear on that point.

Lord Grabiner: I understand what you are saying.

Nikhil Rathi: My point is that the nature of the discretionary commission should have been disclosed. We have not found evidence of disclosure back to 2014.

Lord Grabiner: Discretionary commission was made unlawful by you in rules much earlier on in the story, and that is a separate point.

Nikhil Rathi: Prior to 2021, discretionary commissions were permitted, but the fact of a discretionary commission—the ones that existed—should have been disclosed. It is the non-disclosure of that fact that leads to the unfair relationship.

Lord Grabiner: I understand. Let me try to summarise the point as concisely as I reasonably can. Any reader of your proposed scheme would form the impression that anybody who had made one of these purchases going back to 2007 is now going to get access to the possibility of picking up £750 or £1,000 as of right.

All I am suggesting to you is that there is a deep lack of clarity in your paperwork so far, because you are still in your period of consultation. You do not make that distinction that I have been endeavouring to make between those cases where there has been deliberate concealment, which would entitle you to go back to 2007, and those where there was no deliberate concealment, which would inhibit your ability to do that, and you would be stuck with your six-year period plus a little bit. The burden of proof in demonstrating that an individual has been the victim of deliberate concealment is a matter for the individual consumer.

What I am suggesting is that the way that you have so far framed your paperwork is that that distinction has been obliterated. I just very much hope that, as a result of this process of consultation, you might think again and perhaps decide to make that distinction clearer, because it has a very dramatic financial impact upon the finance companies, it provides a strong inducement to the claims companies to get as much business as they can, and it possibly creates a false understanding in the mind of the consumer that they may be entitled to get more than they are actually going to be getting.

Nikhil Rathi: We very clearly said on the face of our announcement that we think 56% of agreements over this timeframe will not qualify for redress under our scheme.

Lord Grabiner: Why do you not spell that out up front?

Nikhil Rathi: We said it on the face of the announcement within the first few—

Lord Grabiner: There are thousands of pages. I have been through all this material. It is not clear on the face of the document that that is the position.

Nikhil Rathi: Certainly, in the release that we issued to the market, we made it very clear in the early paragraphs. There will be approximately 17 million agreements. The other point is that what we are also trying to do through the scheme is to address the point that you make, which is to make it clear that there will be a very substantial number of agreements, where people are making complaints right now, that will get zero redress. We are able to put that in place through the scheme by clarifying where to draw the boundaries. Otherwise, if we do not do that, the processing of those complaints and the cost of the case fees will all mount up. What we are trying to do is draw a line there.

To the point around the adequate disclosure, if firms feel they have disclosed adequately, the case does not qualify for redress.

Lord Grabiner: All I am saying is that, to a fair-minded reader, what you have just said is not apparent. In my personal view, it should be. It is a matter of concern. You do not raise that point in your letter that you sent to our Chairman on 7 October—you do not make the point that you are now making—nor does the legal opinion that you obtained make this distinction between inadequate disclosure, on the one hand, and the deliberate failure to make a proper, full and frank disclosure. At the moment, I do not think that there is sufficient clarity in your paperwork.

Nikhil Rathi: That is duly noted, Lord Grabiner. Thank you.

Q3 Lord Vaux of Harrowden: Just on this point of disclosure, your consultation that led to the banning of DCAs says, “We found that only a small number of brokers in our sample disclosed to the customer that a commission may be received for arranging finance. Where disclosures were made, they were often not prominent. We believe this is partly because our rules could be clearer on what we require”. Does that not give the finance provider quite a serious piece of evidence that they were, or believed reasonably that they were, following your rules when they did not make the disclosure that you later said they should have done?

Nikhil Rathi: The Supreme Court covered this in quite some detail in its judgment.

Stephen Braviner Roman: Those arguments have been run both in the High Court in Clydesdale and in the Supreme Court in Hopcraft. Our consultation is not an attempt to rerun the litigation that those cases have determined. That is the law of the land. As I said, in Hopcraft, they were clear that there had been breaches of our rules—the one that Lord Grabiner and I were discussing, and others around the prominence of the disclosures, about the fact of disclosing material factors connected with the financial arrangements, which could be said to question the impartiality of the broker or would have been a material consideration for the consumer.

In Clydesdale, the High Court was clear on those points, and the Supreme Court, in Hopcraft, although not directly approving the High Court decision, certainly referred to it in a supportive and endorsing way.

Lord Vaux of Harrowden: Does the fact that your rules could be “clearer” on what we require not mean that the FCA does bear some responsibility for this situation?

Nikhil Rathi: There were adjustments to the rules through the work on motor finance through 2014 to 2021, but the Supreme Court confirmed quite clearly in its judgment that those adjustments were clarificatory and did not change the underlying requirements around disclosure that were required by Parliament under the Consumer Credit Act, because, ultimately that is one source, and then through OFT guidance from 2010 and our guidance and rules from 2014. The Supreme Court covers that in some detail—and we can send you the paragraph numbers—because these arguments were run that somehow the FCA is responsible, and I do not think that the Supreme Court took that point.

Lord Vaux of Harrowden: So you do not believe that you bear any responsibility.

Nikhil Rathi: Those arguments have been tested, and the Supreme Court came to a conclusion. That is the judgment now, and we are now implementing that judgment.

Q4 The Chair: Regardless of what the Supreme Court had to say, you are the regulator. If you have come to the conclusion that 44% of all car deals were unfair to the consumer, I am left wondering where your supervision was.

Nikhil Rathi: The detailed work on motor finance started in 2017. The FCA took on all of 50,000 consumer credit firms in 2017. It focused in the first few years on other priority issues, such as high-cost credit overdrafts, which were very serious issues at the time. We started the work on motor finance, identified that there were issues, confirmed publicly that there were issues around disclosure, asked firms to remedy them, and took steps to ban discretionary commissions. Firms did not remedy the issues around disclosure. They rejected 99% of complaints that came to them. They ended up being referred to the FOS and the county courts, building up in large numbers.

On top of that, there was a mass claims environment, exacerbated by digital channels, as has evolved in the last few years, which requires us to intervene and address this issue now that we have legal clarity.

What I would also say, though, is that, going forward for the future, we now have a much clearer position that will avoid something like this happening again. The source of this was the lack of disclosure going back some time, including before the FCA’s assumption of this responsibility.

The Chair: We asked you whether you had taken legal advice on the rulebook, and you indicated that you had not. Firms that were operating with the rulebook, believing that they were operating appropriately, were doing so on the basis of a rulebook that you said you had not taken legal advice on.

Stephen Braviner Roman: If I do not remember the question correctly, please do correct me. The exchange was in the context of the Court of Appeal decision in Hopcraft, which, as Mr Rathi has alluded to, came up with what most of the legal community thought was a rather surprising outcome, which was that there was a fiduciary duty between a car broker and a customer. The question put to us was about, given that context, whether we had taken legal advice on our rule as to whether a fiduciary duty existed. The honest answer to that is that we did not, because that would have been a very surprising question to seek legal advice on.

Q5 Lord Sharkey: I have no interests to declare, and two questions. The first refers to the technical annexe to the consultation estimates, where the scheme’s administrative costs are expected to reach £2.8 billion, which is more than 25% of the total cost of redress. In what sense does this represent a proportionate outcome? Did you consider ways in which the administrative costs could be significantly reduced?

Secondly, has the FCA estimated the number of agreements that will be covered by the scheme, and the amount of compensation that will be payable, if the FCA applied the statutory limitation period in line with our suggestion of 10 years, rather than all agreements dating back to April 2007?

Nikhil Rathi: On the point around non-redress costs, we know from past experience of mass redress exercises that the operational and administration costs can be enormous, PPI being the most recent example. Some firms told us that as much as 40% to 50% of their overall bill in PPI ended up just being the operational and administration cost. One of the reasons for proposing a scheme, notwithstanding that the costs are significant because the scale of this is large, is that the scheme will enable those costs to be managed much more tightly than us not intervening at all and letting this all run through the Financial Ombudsman Service and the courts, with case fees.

Estimating those non-redress costs is challenging, because there are some banks, for example, that have significant experience of dealing with large‑scale redress. They have sophisticated infrastructure. They can forecast things in a granular way. They have the technology. There are other, smaller firms. We have done a huge amount of engagement on this, and I have spoken to some chief executives of smaller firms who will tell me that their unit cost of dealing with one county court case is £3,000, because they do not have the scale that some of the larger firms do to deal with these kinds of situations.

Part of the reason for putting this into a scheme is that it is free for everybody to use. You do not have to use a claims management company or law firm. We set out the calculation. The Financial Ombudsman Service is bound by our rules, so there is no question that you would get a different decision there. If the consumer is not happy with that, they can go to court, and we cannot take that right away.

We have had such a range of feedback on non-redress costs from firms. We are dealing with 40 lenders here. They all have different systems. We have put our best estimate through. We have also said that, through the consultation, we are very open to hearing how we can work with firms in a proportionate and pragmatic way to use automation, AI and all those modern tools that may not have been there in PPI to bring that down. We have no interest whatsoever in having high administrative costs here unnecessarily. Doing a scheme, and doing it quickly and efficiently, will be the most efficient way of managing a difficult challenge.

On the point around statute of limitation, we have put in there the costs of going back to 2007 and of going back to 2014. Notwithstanding the exchange with Lord Grabiner, the reality is that we already have hundreds of thousands of complaints in the system from 2007 to 2014. There will be more—potentially millions—that will come, and they will all need to be dealt with.

Therefore, if we do not have a broad scope that copes, with a simple message and a clear way of dealing with everything consistently, everything outside will have to be dealt with on a case-specific basis, with case fees and, potentially, county court costs for every single case over many years. One of the things we are doing is we are closing the scheme after a year. If you would like to apply and your lender has not contacted you, you have 12 months from the date when we start the scheme to put an application in, and then it will be closed. If we left all those cases out, this could have run on for years and years and years, as PPI did, which would hang over the market.

We would like to bring this to a close and give certainty to firms, investors and consumers. We think this is the most efficient way of doing it, uncomfortable as it is for everybody, but we now need to move forward and draw this to a close.

Q6 Lord Sharkey: On a related issue, perhaps you can explain the methodology that you used to arrive at the definition of “high commission”?

Sheree Howard: There was an economic analysis undertaken looking at how the cost of credit moves versus the commission amounts. At that point, we started to see that the cost of credit was impacted by the commission level.

Lord Sharkey: What I am asking is how you arrived at the definition of “high commission”.

Sheree Howard: You mean in terms of a percentage of the total cost of credit. We were quite keen to have it dual-headed because otherwise you could end up with unintended consequences because the APR might be low or there might only be fees on the case. We wanted the dual-headed so you did not just rely on the total cost of credit. We would highlight that in the Supreme Court judgment as well it referenced both measures in terms of the percentage of the total cost of credit and the loan. It was done by economic analysis, looking at where the cost of credit started to accelerate based on that commission level, using those two indicators.

Lord Sharkey: Would you mind writing to us to explain in perhaps a little more detail how you arrived at that?

Sheree Howard: There is detail in the technical annexe, but I am very happy to.

Nikhil Rathi: In the engagement that we have done so far, both the hundreds of meetings we have done prior to launching the consultation and what we have done in the last week or so, the very high commission threshold that gets the Johnson Supreme Court remedy does not seem to be that contentious with the firms, because people can see that the Supreme Court came to a view. As Sheree said, they quoted both figures. People just wanted to know the threshold.

The bigger debate is around the 35%/10% threshold, which I would be happy to talk about as well. We have presented our evidence. We have presented evidence around other thresholds. We are trying to determine the point at which firms no longer have a case to answer. The Consumer Credit Act, as passed by Parliament, is interesting, in that it provides a reverse burden of proof. The firm has to demonstrate that the relationship is fair. The consumer has to show what the factual basis was, but the burden of proof is on the firm to show that the relationship is fair. That threshold is important, and we will listen very carefully to the feedback that we have received because we know it is contentious.

What I would say on that is to look at it through the other end of the telescope. Look at what we are doing by defining that threshold. Everything below that threshold is getting zero. If we are going to shut everybody out and they will not be able to go to the FOS for a fair and reasonable assessment, we need to make sure we have evidence. We are taking 17 million agreements out completely. If you think about all those complaints that Lord Grabiner talked about, 56% are going to get zero under our scheme. That, we hope, will help draw a line under it and stop a very heavy administrative cost of processing complaints that are not going to go anywhere.

Q7 Baroness Bowles of Berkhamsted: I have a few questions. I would like to try to clarify in my mind what has come out of some of the previous discussions and what has been said. It does prey on my mind that the FCA rules were not perfect, shall we say, but I think you are saying that that has no bearing. There are no degrees within fault. The fact that the rules might have been a bit confusing is not going to have any bearing on compensation. Is that correct?

Nikhil Rathi: The rules have not been static during this period. We started with OFT guidance. You then had FCA rules. The FCA rules were clarified, and then we had a ban. The point that we are making is that there has been a lot of legal debate around this and multiple court cases. The Supreme Court has looked at it and come up with a decision, including on that point.

Baroness Bowles of Berkhamsted: That is fine. You are saying that that has no bearing on the compensation. One other thing that concerns me is the delay in getting around to investigating this, given that there were complaints. It seems to me that the FCA has thousands of employees who one should think would be a little bit more alert to this kind of thing than the ordinary purchaser. That is an awful lot of mystery shoppers in the FCA. Why did you not have some internal alarm bells ringing about what was going on? Indeed, do you have mechanisms to harvest the mystery shopping that all your employees do, even if not formally?

Nikhil Rathi: We have been through the chronology from 2017 onwards. All of that data is published. As you know, between 2021 and 2024 there was a lot of legal argument going backwards and forwards. That took the time that it took until we got to the conclusion of the Supreme Court in August. We paused in January, did a very detailed investigation with a skilled person reviewing data from 32 million agreements to provide the detailed diagnostic data that we have published alongside the consultation.

We receive intelligence around a range of products. We look at complaints data. Sheree might want to talk about some of the information we get in the Supervision Hub. We are looking to further strengthen the framework in the future, working with the Treasury and the Financial Ombudsman Service, so we can act earlier when situations like this arise.

What I have said clearly is we are not seeing, once this is done, any other mass redress issues on the radar. From my perspective, this is the last significant one. We want it dealt with. We want it dealt with quickly. I have been speaking to investors around the world and heads of groups that own financial services businesses here. I understand entirely that people want certainty and they want this closed. If we can get that done, we can manage the situation differently in the future. Sheree may want to add a bit about the intelligence.

Sheree Howard: As Nikhil said, we track complaints quite heavily. We saw the complaints building up, which is why we intervened when we did at the beginning of 2024 to pause complaints. We wanted to put more order around this area. We also get intelligence through the Sup Hub. That alerts us to potential fraud and scams, for example. You will have seen that we have put out messages in August, for example, highlighting the risk of consumers being scammed in this area because people are purporting to be acting on behalf of this arrangement. We take intelligence very seriously.

Baroness Bowles of Berkhamsted: I just suggest that you could harvest your own internal intelligence in a more formal way. As you probably know from the complaints that I raise, I am a bit of a mystery shopper myself, and I follow it up.

The final thing that I would like a bit of clarity about—it is a general point; it is not specific to this—is the position on small print. There is now so much small print that attaches to all kinds of things. Whatever type of contract you are renewing, you are forced to do it over the telephone. They are now forced to read out all kinds of rules to you to say that you have listened. They speak too quickly and you cannot follow it. You then get a whole ream of small print that may or may not follow, if the download can even be read and it is sufficiently clear, which quite often it is not. Could there be work done to stop the get-outs that you have as a result of small print that really is of no use to the consumer?

Nikhil Rathi: The Supreme Court covered this point around the prominence of the material points in its judgment. Do you want to comment?

Stephen Braviner Roman: The question is a more general one. On the specific point, the rules that we have discussed call out the need for prominence and bringing things to people’s attention, for the very reason that you are highlighting: if you have a 15-page agreement and buried away in the small print is something that is absolutely crucial to your evaluation of the fairness of the deal from your perspective, that is not really a fair disclosure. In some instances, that is what has been going on in these sorts of cases. There are other cases that are different.

In these cases there was a specific requirement for prominence. To your more general point about this wood-for-the-trees difficulty, without being too philosophical, it is a problem that the law can sometimes drag us into. To cover every possibility, you need to write things in an incredibly long and detailed way. The communication ceases to be a meaningful communication for anybody and becomes an exercise in lawyers earning money. That is a real problem, speaking as a lawyer. We are getting into a societal, legislative or Parliament problem, rather than just a financial services problem.

Nikhil Rathi: Within the Consumer Credit Act itself, unusually, there are hard-wired disclosures in the primary legislation. The Treasury has been reviewing that since 2022. It is a strange set-up. We would question the utility of those disclosures, particularly in the context of a digitalised financial services world. It takes a lot of time to change legislation.

The Chair: Yes, and it is clearly overdue.

Q8 Lord Eatwell: I want to come at this issue from a completely different direction, because one of the things that we highlighted in our report on the secondary objective around growth was the negative impact being made on the UK economy by what could be called the retrospective regulatory premium of PPI and now this.

In your cost-benefit analysis, I could not find an estimate of the cost to the UK economy of that deterrence; in other words, what is the considerably negative impact this will have on investment in the UK economy? What is your cost-benefit analysis of that? That is the first question.

Secondly, Mr Rathi said just now, “We want to manage this differently in the future”. What are the three points in the plan to manage this differently in the future? Given my first point, this is doing serious damage to the British economy.

Nikhil Rathi: On the first point, we commissioned an external party to talk to investors around the world in a range of capital markets—equity, debt and other markets—about sentiment. We have published that work. There is this perception around the way in which the UK legal framework works.

The Supreme Court was very clear. I have heard this word “retrospective”. The Supreme Court was very clear that this is about the rules and laws that were in force at the time. This is not a case where the FCA changed the rules in 2021 and is trying to apply those rules retrospectively. Those arguments were run in the Supreme Court and they were dealt with by the Supreme Court.

Nevertheless, I understand the point. If you are sitting overseas as an investor in UK financial services, you are looking at this and you are thinking, “How do we bound this?” We had a debate with Lord Grabiner about the statute of limitation and all the rest of it. We have shared our legal assessment around that.

We have looked at the markets. We have been monitoring this very closely over the last year. We want to draw this to a close; we have bounded it. You have seen that the equity markets have been fairly constructive over the last year or so. The banks most affected by this have seen, at least year to date, very significant share price increases. The securitisation market for UK automotive loans opened again last month after our announcement in August. We are monitoring the product sales data. We are monitoring the Bank of England’s monthly motor finance data. We have seen continued growth in motor finance lending. Indeed, just last week, in the new licence plate month, September 2025, there was a record number of new car registrations. That demand signal remains strong and solid. The market is working. That is the highest since September 2020.

We are monitoring every aspect of the capital stack to see whether it is working. We are talking extensively to international investors. I have personally done dozens of meetings to make sure that they understand where we are coming from and to explain that we want to get this dealt with and then move forward for the future. For the future, how is it different? We have the consumer duty in place, which is enabling us to be much more outcomes-oriented and will, I hope, avoid these things happening in the first place. We think firms have taken that to heart, and we have seen improvements.

We are also being more assertive in using our powers earlier where we see problems. You have seen that in gap insurance, for example. That is one intervention that we made in the market. Baroness Bowles asked about mystery shopping. We intervened earlier where we saw problems. When they come through legislation, we will also be helped by the further changes to the framework around the way the FOS interacts with us and, in time, the CCA. Those are the three things that I would point you to.

Lord Eatwell: On the consumer duty, am I right that it applies not just to consumers but to SMEs? In other words, there is a responsibility of the insurer to an SME requiring an insurance product.

Nikhil Rathi: The overwhelming volume of SME business is outside of FCA regulation, but there is a very specific threshold that does fall within our ambit. Parliament sets that threshold. To the extent that it is within that threshold—this is typically sole traders or loans to SMEs under £25,000—it would fall to us. Otherwise—

Lord Eatwell: Otherwise, SMEs are exposed.

Nikhil Rathi: We saw that in business interruption, which was our other interaction with the Supreme Court in recent years. We intervened in that case. That was not based on our regulation. We intervened because we felt that insurers were not complying with their contracts with small businesses on business interruption. It was a contractual case. The reality was that small businesses did not have the wherewithal to take the case themselves. We took it on their behalf. The Supreme Court ruled as it did and made sure that businesses got the insurance payout that they should have got.

The Chair: You missed out from your list the movement in recent days where banks have had to increase substantially their provisioning following the publication of your report.

Nikhil Rathi: We set out on 3 August what our bounded estimate was. We wanted to give an indication there. Our methodology is lower than the Supreme Court remedy. It is lower than the Clydesdale remedy. We will hear all the feedback on this.

The point that I would make is that Parliament has given the courts an unusually broad remedial power for Consumer Credit Act unfair relationship cases. The Supreme Court did not do an assessment of loss when it decided that commission plus interest was the remedy. The High Court also noted the very broad remedial powers.

We have done a loss-based assessment. We have set that out with all the econometric analysis. We are also required, when designing a scheme, to do something that we consider to be just; Parliament has asked us to do that. Therefore, we have come to the view that we cannot be just if we completely disregard the reference point that the Supreme Court and High Court have determined. That reference point will, of course, be influential on what lower courts will decide, if these cases go to court. That is the balancing act that we are striking.

We have put all the evidence out there. We recognise that there is a spirited debate from all sides of the argument. There are some areas where we have been very proportionate. The commercial interest rate we have proposed is base rate plus 1%, which is a weighted average of 2.09%. Bear in mind that the High Court, less than a year ago, blessed a compensatory interest rate of 8%. That is worth several billion pounds.

Q9 Lord Hollick: Since 6 April 2007, there has been a rising tide of complaints about car finance arrangements. In the course of this meeting so far, you have chronicled some of the actions that have been taken. What is surprising is that, as a regulator, no action was taken at an early stage to address the problem. It is clear that people were unaware and were not told or were maybe deceived about the sheer size of commissions that were being charged. Surely back in 2007, or shortly thereafter, the regulator could have spotted that there was a gap. The information could have been put on the front of the contract, which would have given it due prominence. Questions could have been asked, and there could have been no question of whether they were asked or answered.

Why is it that for most of the last 18 years this issue was not spotted and acted for? Do you not have the powers to do that? Do you not have the people to follow up on these issues? The public has been poorly served by the regulator.

Nikhil Rathi: We took on responsibility in 2014. You are going back to 2007. It would have been the OFT then. There was a transfer over to the FCA in 2014. The OFT put out guidance in 2010. There were then rules and additional guidance from the FCA. We went through the study in 2017-18 and then we took action in 2019, when these issues were called out. You are asking whether we could have acted earlier. One question is whether we should have moved to put in a redress scheme more quickly. Could we have done that rather than waiting for all of the issues?

Lord Hollick: I am thinking even before that. You were alerted in 2007 that there was a problem here. Why did you not take action at that stage, or shortly after, to address the problem?

Nikhil Rathi: Consumer credit was not under the responsibility of the FCA in 2007.

Lord Hollick: When did you have the powers?

Nikhil Rathi: That was in 2014.

Lord Hollick: Why did you not take action then?

Sheree Howard: When consumer credit transferred, we had 50,000 firms that had to be onboarded and re-authorised from the OFT. Critically, a harm-based assessment was taken of the market. It was high-cost, short‑term credit—this goes back to the Wonga days and things like that—where we intervened very heavily. There was rent to own, catalogue credit and overdrafts. A whole series of actions was taken by the FCA in the period from 1 April right the way through to 2019, with motor finance starting in 2017, as Mr Rathi has already alluded to. There was a whole series of investigations.

There was something like £900 million of savings for consumers based on our interventions across a whole range of areas. That was done with a harm-based approach. We started where it was deemed at the time that the harm was most egregious because high-cost short-term credit was being used by the most vulnerable of the UK public. That was the order it was tackled in, in light of the information that we had at the time.

Lord Hollick: Going back to 2014, would it not have been possible to have put a warning or an alert on the documentation, to say, “There are very high levels of commission. The provider of credit should be required to provide that information”, not in the small print but on the face of the document?

Nikhil Rathi: Our rules did require that.

Sheree Howard: We have already alluded to the fact that our rules in 4.5.3 required the broker—

Lord Hollick: I dare say that most consumers have not read 4.5.3.

Sheree Howard: No. The requirement was on the firm, if the commission was such that it would impact—

Lord Hollick: Let me ask the question in another way. In the light of this saga, is there is a case for rather firmer action and early action from the FCA as a regulator, to protect the public when there are clearly some confusions?

Nikhil Rathi: We absolutely want to make sure that consumers are clearly and properly informed. That is why one of the limbs of the consumer duty is—

Lord Hollick: Do you have sufficient powers to do that?

Nikhil Rathi: We have sufficient powers to do that. We have seen significant improvements in the communications to consumers across a range of markets. The outcomes-based focus of the consumer duty allows us to apply that with agility and a bit less rigidity than the Consumer Credit Act. The Consumer Credit Act is quite tight in terms of what is prescribed in legislation. We had a separate discussion with the committee around proportionality, competitiveness and how prescriptive we should be in every market.

If I could just digress for one second, on insurance, we always have to make decisions about how we prioritise our resources. In the last year, we have focused on motor insurance, premium finance and gap insurance. There is a super-complaint in from Which? asking us to focus on home insurance and travel insurance. We have identified issues with home insurance. Storm damage is the main issue that we are concerned about. We have published data around that. We have had a separate report in from another body asking us to look at pet insurance as a market. We have to make a judgment about our resources and, in each of these segments of the market, what we are going to focus on at any one time.

As Sheree said, the really significant harm in consumer credit was high‑cost credit and all those kinds of issues. That is what the FCA focused on in the first couple of years, as well as the massive operational issue of bringing 50,000 firms across and getting them used to the new regulatory system.

Q10 Lord Lilley: Over the last decade at least, billions of pounds of illegally undeclared or excessive commissions have been charged to consumers. That was against the law. Are we agreed on that? The Supreme Court said that they were illegal. That happened, therefore, because either your rules permitted something illegal or your rules did not permit it but were not enforced. Which was it?

Stephen Braviner Roman: The Supreme Court was clear that our rules were being breached.

Lord Lilley: They were not enforced.

Stephen Braviner Roman: It was also clear that the Consumer Credit Act was not being followed. I do not want to repeat the points that have been made, but we have been working through this market and trying to work through it in a prioritised and harm-based way. Discretionary commission arrangements were the arrangements that we thought were the most egregious. If you look at the detail of our scheme, discretionary commission arrangements make up the vast bulk of the agreements that we think will lead to redress. Those are the things that we banned. We made the rule in 2020 and it came into force in 2021. That is where we focused. It was not that there was no enforcement. It was that we were working through in a prioritised order.

Lord Lilley: So there was enforcement.

Stephen Braviner Roman: There was enforcement in the sense that we looked at the market and we saw that people were not following our rules, and there was a particular practice that we thought was particularly egregious. The inherent risks of a conflict—

Lord Lilley: You went to the companies and said, “What you are doing is illegal”.

Stephen Braviner Roman: Yes, and we banned it.

Lord Lilley: Why did it go on so long?

Stephen Braviner Roman: These discretionary commission arrangements did not continue after 2021. There may have been some particularly egregious examples. I cannot say that the market stopped entirely, but essentially that practice ended in 2021, when we banned it.

Lord Lilley: For the previous seven years of your jurisdiction, it operated.

Nikhil Rathi: For the previous seven years it was permitted, but they were required to disclose that there was a discretionary commission arrangement, such that they would get a higher commission if they adjusted the interest rate. That was it. The issue was that they were not disclosing it.

Lord Lilley: That was illegal.

Nikhil Rathi: That was against our rules. That was against the Consumer Credit Act, as now confirmed by the High Court and Supreme Court.

Lord Lilley: It was illegal and it was against your rules, but it was not enforced.

Nikhil Rathi: It breached the Consumer Credit Act, and that legal clarity has come now.

Lord Lilley: Before then it was unknown that it was illegal?

Stephen Braviner Roman: No, it was not unknown that it was a breach of our rules. Unless people are saying that a very high commission or an arrangement where a broker can increase the interest rate that an individual pays for a product and in return gets a higher commission paid to them for that work. If people were thinking at the time that that was consistent with our rules, then that was a very surprising judgment for a professional person to reach. There is no doubt that those facts were contrary to our rules.

What has been made very clear by the very helpful decision in Hopcraft—as you know, the Consumer Credit Act is a very broadly framed piece of legislation. Going back to 2014, as it happens, the Supreme Court said in Plevin that it is a very broadly framed piece of legislation. There are lots of blanks in the framework of that Act. Our regulatory rules fill in some of those blanks, but it was a contested matter, in terms of the Consumer Credit Act, as to exactly what the factors were and what the role of our regulatory position was in determining whether something was unfair. In Hopcraft, the Supreme Court clarified that, listing the factors, pointing out the relevance of our rules and pointing out that the sorts of practices that we are talking about were contrary to our rules.

Nikhil Rathi: Even today some firms do not accept that they were breaking the rules at the time, notwithstanding the judgments. In the system, if a lender disagrees, they have a right to challenge that. Getting to that concluded position through the court system is what has taken the time. The Court of Appeal came to one view; the Supreme Court came to a conclusive view.

Lord Lilley: Your rules were about what was illegal, but what was illegal was uncertain. Were your rules uncertain?

Stephen Braviner Roman: No. Our rules were clear on what they required. To act contrary to our rules was contrary to the regulatory regime in place. What was argued about and clarified by Hopcraft in the Supreme Court was the significance of that regulatory breach in terms of the Consumer Credit Act and what the particular factors and weight to be placed upon certain factors were in determining whether a particular relationship was unfair.

Lord Vaux of Harrowden: You have just said your rules were not uncertain. Can I take you back to your document of October 2019? This document specifically says that you believe the disclosures were not being made “partly because our rules could be clearer on what we require”. Your rules were not clear. You say so yourself.

Stephen Braviner Roman: The rule said “existence” and we added in the words “and nature”. The change was clarificatory. The Supreme Court has said throughout the whole period, going back to the OFT rules and guidance, that the standards of disclosure were the same. It is not fair to say that our rules were uncertain in a way that was meaningful so that a lender or broker was unclear. They were offering a service to an individual and saying, “I will go and get the best rate from my panel of lenders”, when in fact they had a tied relationship with a particular lender and they offered that lender first refusal of the business.

Lord Vaux of Harrowden: Why did you say that the disclosures were not happening partly because your rules could be clearer? I do not understand. The two things are completely in contrast to each other.

Nikhil Rathi: Every time we make an adjustment to rules, there will be a reason why we are making adjustments to the rules. In that case—again, this was prior to my time—the FCA felt that it could clarify the rules to improve them.

Lord Vaux of Harrowden: You said that the lack of disclosure was partly because the rules were not clearer.

Nikhil Rathi: These arguments have been run in the Supreme Court and dealt with by the Supreme Court. That point, in and of itself, did not obviate the need for disclosure. Stephen talked about the other aspect that came out in the Johnson case. Frankly, the broker was telling the customer one thing and doing something else. They told the customer, “We are getting you the best deal from a panel of lenders”, whereas in actual fact they went to a single lender with whom they had a tied relationship.

Lord Vaux of Harrowden: That is very different. That is a dishonest statement as opposed to simply not saying it because they did not feel they had to under your rules because your rules could have been clearer. That is a very different thing.

Nikhil Rathi: We will always be evolving our rules, in light of feedback, to improve them, but that does not mean the rules did not have force and effect prior to any amendments. There is always going to be an iterative process with a rulebook of our size.

I could point to many elements of rules we have inherited that are not clear. On the wholesale side, we have inherited a vast acquis from the European Union. I can point to a number of areas there that are not very clear, but that does not mean they do not have force. We are working through them, with the Government, to improve that clarity.

The Chair: Are you done, Lord Lilley?

Lord Lilley: I am, though I am now unclear as to what was unclear.

Q11 The Chair: Just on this point, if discretionary commissions were illegal and/or breached your rules, before you banned them, how many cases did you bring enforcement against?

Stephen Braviner Roman: If I can clarify, discretionary commission arrangements were not illegal before we banned the practice in 2021. High-commission arrangements of the level in Johnson or any level are not illegal per se.

The Chair: I am fretting about what the consumer harm was. You said that 44% of deals involve consumer harm. I am just thinking personally. If I buy a Land Rover, which I have done, I will go along with my second‑hand Land Rover. You deal with tied finance in a rather unclear way. The dealer will say to me, “I will give you X for your second-hand car”. Like most people, if I am taking out a credit agreement, I am not concerned about what the commission is; I want to know how much it is going to cost me a month. If I am not satisfied with this particular dealer, I can go to another dealer and ask them, “How much is it going to cost me a month and how much am I going to get for my car?” That is what happens in the real world. People do not say, “How does the finance agreement work? What is the commission?”

In my case, I go along to the dealer and say, “I would like to buy this new Land Rover. What will you give me for my old one? It is now outside its warranty after three years”. The dealer gives me a figure and I say, “If I take out credit, what will you give me for my car?” He will say, “I will give you £1,000 more”. He will not say, “You should be aware that I am looking only at Land Rover finance in this deal. We have not looked at other things”. I did not ask him what the commission was. I was very happy that I got extra money for my car. A month later, I paid off the credit agreement without penalty. As I read your scheme, I am going to be compensated because I have been poorly treated. How can that be right?

Nikhil Rathi: The High Court dealt with this. This is what it said at paragraph 255 of Clydesdale. “The customer’s borrowing costs are increased by the broker’s choice of an elevated interest rate. That is so whether or not, in the self-serving view of the lender and the broker, she is more than compensated for that by other features of the transaction”. The reason there is compensation coming is the courts have ruled that there are valid claims here that have breached the law.

The Chair: I would not dream of doing so. I was very satisfied with all these arrangements.

Nikhil Rathi: Based on our consumer research, 14% of consumers do not intend to claim because they say they are satisfied. They do not have to claim.

The Chair: That was not my question, Nikhil. My question was: why I should be entitled to make a claim? What harm have I suffered as a result of a transaction from which I benefited?

Nikhil Rathi: You are entitled to make a claim because Parliament has passed a law, the Consumer Credit Act, which provides very broad remedial powers for the courts to provide compensation where the law has been breached. The Supreme Court determined that was commission plus interest. It took the decision to determine a remedy. It did not look at the detailed harm. It determined the remedy using the unusually broad remedial powers that Parliament has given courts. That is also what is the case in other CCA-type cases. We have taken those as reference points. We have also provided our econometric evidence of what we believe the harm has been. That is how we have come to the APR minus 17% adjustment.

The Chair: What are the implications of what you have just said for motor manufacturers that have associated finance companies, then?

Nikhil Rathi: I have personally spoken to a number of them. First of all, we have put out all the data around the state of competition in the market. We have done detailed analysis of it. Some 80% of new cars draw on finance for their purchase. We continue to see that market being healthy. There is clearly a liability here that needs to be addressed, but there is continuing competition in that market, which is enabling it to work. I agree that it is challenging, which is why we are pleased that disclosure practices have now improved quite considerably, which will prevent this happening in the future.

In addition, the relationship between lender and dealer has been a challenge in the way that this market worked. You are familiar with it, Lord Chair. There was not sufficient oversight of the dealers by the lenders. Under the Consumer Credit Act, the lenders are on the hook for the actions of their agents. They tried to run arguments: “It was the dealer who did the deal. It was the broker. Why should we be held responsible?” The fact is that is what the law says. They were not exercising sufficient oversight of the systems and controls of some of the brokers who were selling their products. They have ended up with the liability for the misconduct of the brokers.

One of the questions to us is, “Why are you not imposing this liability on the brokers, the used car dealers or the car dealers?” That is because the law says it is the liability of the lenders. The lenders may wish to pursue the brokers commercially, but that might impact the franchise value of their businesses. There is a challenge there.

Q12 Lord Vaux of Harrowden: I hesitate to come back to this, but I confess that I am getting slightly frustrated by the sheer unwillingness to accept that the FCA could have done better. Just to talk through what you have said, you took over consumer credit in 2014. You prioritised other things over motor finance because you felt that they were higher-risk at the time. You started looking at motor finance in 2017, which presumably means you were concerned about the situation at that point. You concluded in March 2019 that there was a real problem and you felt that areas should be banned. You started a consultation in October 2019, in which you accepted that the disclosure situation was partly because your rules could have been clearer. It says that in writing. You banned the DCAs and took action only in 2021.

From concluding that there was a real problem to taking action, two years passed. Presumably, some millions of consumers suffered further harm during that period of two years. You surely cannot be telling me that that could not have been done better, at least with hindsight.

Nikhil Rathi: Clearly, the ideal situation would be for every single rule to be drafted perfectly at the outset. Not every single rule is going to be drafted perfectly. Those two years were 2019 to 2021. I would not want to use the pandemic as an excuse because we were doing a lot of work, but the reality is that a lot of work was consciously put down in 2020. Imposing new rules or bans on an industry that was on its knees in 2020 would not have been a proportionate thing to do.

In terms of the credit markets in 2020 and 2021, we were focused on borrowers in financial difficulty during that period. As the situation started to normalise at the start of 2021, we formalised the ban. We had asked lenders to remedy the disclosure issues in 2019. They were rejecting all the complaints that were coming to them. The customers were saying, “I feel like you have not disclosed to me”, but 99% of the complaints were being rejected. That is what led to the build-up of cases. That is what led to the disputes in the courts. We were tracking the court cases. There were different judgments coming from thousands of court cases. We needed a senior court, ultimately the Supreme Court, to give us the clarity on the CCA, which it has now done.

Lord Vaux of Harrowden: I am sorry. That is a slightly different point. During that period from March 2019, when you concluded there was a real problem with this, to 2021, when you actually stopped it happening, how much harm was done to consumers? You knew there was a problem, but you had not stopped it. How much of the £8 billion or whatever arose during that period of time?

Nikhil Rathi: We can give you a rough average of the number of agreements. It is a few million every year.

The Chair: Perhaps you could let us have a note.

Nikhil Rathi: Of course, the market was on notice at that point that there was a problem. The market was on notice that we were concerned about compliance with disclosure rules. We said that explicitly in 2019. This was prior to my time. I joined on 1 October 2020. Looking back at it, they were told. There were some industry initiatives to seek to improve disclosure, but they did not go anywhere. Some lenders did improve their disclosure practices. Not everyone did. This is the other issue. This is a very heterogeneous market. Different lenders have different practices across different times. Some lenders improved. Some lenders resisted changing their practices for quite some time because they wanted to hold out.

It is not that different now. Some lenders are still insisting, if you look at the notes to their accounts, that they complied with all the rules at the time. They have not accepted that they breached them. Others have accepted and are now having a discussion about how they remedy. Different people take different positions.

Q13 Baroness Donaghy: My questions are on a different tack, because this area has been covered extensively. I have no interests to declare. I have never bought a Land Rover.

The Chair: I can sell you one.

Lord Smith of Kelvin: You will get a very good deal.

Baroness Donaghy: I have never owned a car and I do not drive, but last week I received a text to say, “Our records indicate you could be owed up to £2,382.58 in mis-sold car finance. Check for free”, with a website address. What steps is your organisation going to take to limit the role of scammers and ambulance chasers and to keep some control over the scheme?

Whatever the background and whatever our views of your involvement as an organisation, I understand that you have a stable to clear. There are no depths to which these companies would not have sunk and still would not sink, if the law were not there to prevent them. I understand all that. I understand the time limit that you have suggested. I personally think it is a very good idea, not least for the British economy and for clarity in the future. I understand all that.

How are you going to get control over the kind of situation where somebody who does not drive and has never owned a car can receive that text message? I would love to know where this figure comes from.

Sheree Howard: So would we.

Nikhil Rathi: I can empathise. I have had emails to my FCA email address saying that I have signed up to one of these companies, which is a very unwise thing for that company to have done, I can tell you. Sheree can explain.

Sheree Howard: We are taking a range of actions. First of all, I would emphasise what Mr Rathi said earlier. Some 90% of the complaints in the system in this area are from law firms, which are regulated by the Solicitors Regulation Authority.

Parking that, we have done a range of actions. We have removed or amended financial promotions in over 700 cases. From looking in the market at what has been going on, we have acted against our own regulated CMCs. We have issued CEO letters to our regulated CMCs, highlighting what we have seen them doing and what action they need to take to amend those. We are intervening very strongly.

For our regulated community, we have looked at what exit fees they are charging. If a consumer wishes to exit an agreement that they have signed up to because they have access to a free redress scheme, they might not want to give up to 30% of their redress to a CMC. We have looked at exit fees and taken action against two firms to reduce them because we thought that they were disproportionate. We want consumers to be able to exit. Obviously, those firms will have spent time and cost, but we have massively reduced them.

Similarly, we have put out warnings with the SRA. The SRA is taking separate action. In its press release at the beginning of last week, it said that 76 firms are under investigation and it has stopped five from acting. We have stopped two from onboarding new business. We have referred some to enforcement investigation. There is a whole raft.

Similarly, under our non-FISMA powers, we are using our unfair contract clause to request information from law firms about their contracts. We have done that. It is an information request that is currently out in the market with law firms. There is a whole raft of action and activity under way in this area to try to limit that.

We are very clear that some of the financial promotions in this area are not clear. They are misleading. They are unfair or not clear. They are demonstrating high levels of potential redress; using a sense of urgency and saying that the consumer has to act now in order to get their redress; or saying that their redress is guaranteed, which it is not. As we have said here, 56% of people are not going to get redress through this process. The amounts that they are claiming are high. We are absolutely taking action, where we see that. Coming back to the Consumer Hub conversation, anybody who sees these can raise them to us, if we have not spotted them. Where we see them, we will take action.

We have recently issued a joint press release with the ICO, the SRA and the Advertising Standards Authority, highlighting that we all are taking action. The ICO is absolutely taking action against certain firms where it is aware of mass flooding of inappropriate messages, as you have experienced. We know it is taking action, but that is for it to declare publicly.

Q14 Lord Smith of Kelvin: I am looking for a bit of clarity on the not being retrospective. Until 2021, firms were obliged to disclose only the existence of a commission. After 2021, you extended that to disclosure of the nature of a commission, which you have mentioned earlier. Firms presumably acted in good faith and followed the FCA rules. That meant they were legally compliant. Is it not the case that some firms are now being asked for up to £11 billion in redress for not disclosing things that your specific rules and commissions did not require to be disclosed?

Stephen Braviner Roman: No, in short. That is what the Clydesdale case was about. That is what Hopcraft has been about. The tweak to the rule that you have identified does not remove the obligations on someone who had a discretionary commission arrangement and who has not disclosed the existence of that arrangement. If they had said in their documentation, “We have a discretionary commission arrangement and we will be receiving remuneration under that”, in a nice and prominent way, that would be completely compliant with our rules and under the scheme no redress is payable. If they did not do that—subject to other details in the scheme such as time limits and so on, if they subsequently informed the consumer—they would be acting contrary to our rules that were in force at the time.

Lord Smith of Kelvin: Pre 2021, if they had just said, “Yes, we have an agreement”, that would not have been enough.

Stephen Braviner Roman: Pre 2021, if they had said, “There will be a discretionary commission arrangement payable on your loan”, or some form of words around that, that would have been enough. They were not saying that. They were not describing the loan in sufficient detail so that somebody who was buying a Land Rover or another car could understand what was going on to make an informed decision: “Okay, that is fine. I am happy that I will pay 2% extra and they will get an extra £300. That is fine”. That is what was happening.

Lord Smith of Kelvin: My reading of the thing was it was just, “Yes, we have an agreement”, and then they send you a subsequent thing saying, “There is a few thousand”. That is fine.

Q15 The Chair: Can we just pick up on that point? Firms have to show how they behaved. They can keep records only for up to seven years under GDPR. How on earth are they supposed to be able to defend themselves against a dishonest version of Baroness Donaghy who makes a claim? There are a whole raft of these claims companies. We got evidence at some stage that two people who ran a fish and chip shop were trolling the internet and running a claims management company. You could have claims management companies that have the same names. There might be 10, 12 or 14 of them all with the same name. Who gets paid? Is it the first one that made the claim? How is that going to work in practice? How are banks meant to respond to this, given that they will not have the records? The opportunities for fraud are pretty clear. It is a very unsatisfactory position, with huge administrative costs.

Stephen Braviner Roman: There are a number of points there. First, in relation to the rules on holding records, our rules require firms to hold them for six years after the end of the agreement. That takes you back a certain period of time.

The Chair: It does not take you to 2007.

Stephen Braviner Roman: No, it does not. We have spoken to many firms. Many firms do in fact have records going back to 2007. We have also spoken to third parties, credit reference agencies in particular, that have records that are accessible by firms. Firms use them on a commercial basis already to access that material.

The Chair: Would they know whether or not they had disclosed the commission?

Stephen Braviner Roman: They would not know that, but they would have the details of the agreement.

The Chair: It would establish that they had an agreement, but it would not establish the basis on which it had been made.

Stephen Braviner Roman: No. The evidence that we have trawled from the 32 million agreements, certainly, in relation to the discretionary commission arrangements that we were just discussing, which are the vast bulk of the ones caught up in the 14.2 million agreements that will be entitled to redress, our work has discovered almost zero adequate disclosure of those arrangements. They were just not being disclosed. We think it is perfectly right and proper in those instances for the burden to be on the firm to prove that they disclosed it.

The Chair: I am not going to prolong this, but I notice your use of the word “adequate”.

Stephen Braviner Roman: That is because it is the language from our rules.

Lord Grabiner: Yes. That is the language from the opinion. That is exactly the point. We are back on this argument. I do not want to lengthen the debate, but there is a difference between adequate disclosure and deliberate concealment, is there not?

Stephen Braviner Roman: Yes, I do not dispute that.

Lord Grabiner: The short point, from my perspective, is that the scheme that you are proposing does not make it clear to the world that there are limits to what you can claim as a consumer. That is a serious criticism of the scheme that you have so far propounded. I hope that you will give consideration to that in any revised draft that you eventually reach.

Stephen Braviner Roman: We will do that. Just to be clear, it is in the scheme. There may be a question about its prominence.

Lord Grabiner: We are talking about the small print again, are we not?

Stephen Braviner Roman: It is definitely in the scheme, just to reassure you.

Nikhil Rathi: I recognise the point you are making, Lord Grabiner. A lot of the consumer reaction has been, “Why is the FCA scheme short‑changing us?”

Lord Grabiner: Yes, much encouraged by your reaction to that complaint. I understand that.

Nikhil Rathi: There is a sense that there are some boundaries. We have been clear from the point that we communicated in August that claims of thousands of pounds were speculative and unrealistic. At that point, we said, “To the extent that there is going to be compensation, it will be hundreds, not thousands”.

If I could just make one point on those claims management companies, there was a very important report—I cannot remember whether it was by the Law Commission or the Civil Justice Council—around litigation funding that came into the Government and Parliament. It is perfectly lawful. It is not within our ambit. It merits further examination because these law firms are funded through that mechanism, with tens of millions of pounds of litigation funding paying for advertising to drive up some of the experience that Baroness Donaghy and millions of others have had. We do not control that.

Lord Grabiner: That is not true. My suggestion to you is that the strategic programme that you have propounded is an encouragement to consumers and claims companies that they are going to end up getting more money than, strictly speaking, in law they are entitled to.

Nikhil Rathi: We disagree with that. It is the opposite. We have proposed remedies that are lower than the Supreme Court and High Court. The challenge that we are facing is we have people saying to us that they will get more if they go to court. We would respectfully disagree with you, Lord Grabiner.

Lord Eatwell: There is one issue that I would like to clarify, which derives from your answer, Mr Rathi, to my question about whether SMEs are covered. If I am a small builder with a turnover of £250,000 a year, if I bought my white van and my white van was sold to me under credit without disclosure and so on and so forth, am I covered?

Nikhil Rathi: Yes. If you are a sole trader, you are. If you are a limited company, you are not.

Lord Eatwell: The issue is whether you are a sole trader or a partnership.

Nikhil Rathi: A limited liability partnership is not covered. That is what Parliament has defined.

Stephen Braviner Roman: The Consumer Credit Act is where those limitations are found as well.

Q16 The Chair: We have probably run the course. It has been a very interesting discussion. The emphasis has been on—I will not use the word “retrospection”—going back to 2007. Is that something which, as part of the consultation, you are prepared to consider changing?

Nikhil Rathi: We have asked a question on it. Everything in the consultation—

The Chair: I just asked you the question.

Nikhil Rathi: We have asked a question on it. We have provided data to inform the consultation of the different costs from 2007 to 2014. We are engaging with the firms, as Stephen said, on the operational issues.

The question that we have to address is a purely practical one. If we do not include them, what do we do with the hundreds of thousands or potentially millions of complaints pre 2014? We are going to have to do something. We have paused them.

In law, these consumers have rights. We have interfered with those rights by pausing them. We need to give them an answer as to what we do. If we do not include them in the scheme, they will go into FOS and the courts, with the costs and potential inconsistencies that that would entail. We are open to views on the methodology.

The Chair: Is that a yes or a no?

Nikhil Rathi: It is a consultation. We will hear all the views and then we will reflect on what the final position should be. We are open to all of the questions we have asked in the consultation.

Baroness Bowles of Berkhamsted: We have been told in the past that the consumer voice is supreme. That is when you were here and I was talking to the Chair. That was about a different issue. Whose voice is supreme in this consultation?

Nikhil Rathi: We will follow the objectives set by Parliament. I would point you to our submissions to the Supreme Court when the Supreme Court considered the Hopcraft judgment. We intervened to say that we felt the Court of Appeal had gone too far. You can see the criticism that we got from consumer groups for having done that.

Baroness Bowles of Berkhamsted: Yes, quite.

Nikhil Rathi: We made the claim that the consumer voice is supreme. We have a job to do, which is to make our assessment of the law. You have asked us to look, in this scheme, at what is loss-based and just. That is what the law says. Looking at what is just requires us to look at what the courts have said. We are seeking to strike the right balance. That is why we have published the data that we have.

There are many elements of proportionality in our proposals, particularly around the interest rate, which will bring down the redress liability. We will hear feedback on that point from the other side of the argument, which we will have to consider carefully as well. As you might imagine, we are already getting a significant response from individual consumers to our consultation. I am not sure whether they have read all 1,000 pages, but they have certainly been quick to send us emails as to what they think.

The Chair: If you are offering people free money, you tend to get quite a good response. On that note, we will conclude this session. Thank you.