It's not quite "wind your necks in" but maybe "settle down a bit chaps?"
In one of the larger shake-ups to financial regulation, the last Conservative government gave financial regulators a secondary mandate – don’t just regulate blindly, think carefully of the result of your regulations on the growth of the economy and the competitiveness of the companies affected. UK Finance has already called for a competitiveness champion to be appointed to make sure regulators keep in mind their secondary objective. “Such an appointment could augment the secondary competitiveness objective as well as the new regulatory remit letters,” David Postings, boss of UK Finance, said to CityAM.
And in good news for those of us who get regulated, it appears that Chancellor of the Exchequer Rachel Reeves has listened and is poised to call for a significant reform of the UK’s financial services redress system. This is not a moment too soon as banks prepare for a potentially massive wave of compensation claims linked to alleged mis-selling in the car finance industry.
Reeves is expected to announce her intentions in her Mansion House speech on Thursday, where she will address leaders in the City of London, aiming to reassure them of her commitment to economic stability following her recent £40 billion tax-increasing Budget. Leaks have suggested Reeves will publish formal letters redefining the remit of the FCA and the PRA shortly before her speech.
Reeves’ call for reform comes amid growing concerns over the role of the Financial Ombudsman Service (FOS), which has sided strongly with consumers in disputes over hidden commissions in lending, a stance that has raised alarm in the Treasury.
This approach by the FOS has left banks, already reeling from a recent Court of Appeal ruling on undisclosed broker commissions, vulnerable to billions in potential compensation claims.
“The FOS has an important role to play in protecting consumers but there is a case for modernising it and giving consumers and firms more clarity,” said a source close to Reeves’ office to the Financial Times. The Chancellor is expected to outline her vision for a modernised system that addresses these compensation issues more transparently.
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The recent Court of Appeal ruling has placed banks under intense scrutiny, uncovering longstanding flaws in the car finance sector’s handling of commissions. It found that car dealerships and brokers had often failed to disclose commission arrangements to borrowers adequately, which may have led to inflated interest rates on car loans. The ruling noted that many consumers were not informed of the commissions earned by brokers, with some arrangements involving a “difference in charge” (DIC) model incentivising brokers to increase rates for higher commissions. The judgment stated unequivocally: “The consumers were very poorly served by the brokers and the lenders alike.”
This verdict has led to a surge in complaints to the FOS, with nearly 16,000 car finance-related cases in the three months leading up to April - a fivefold increase from the previous year. Many of these claims are being handled by claims management firms, which have become notorious for their role in pursuing payment protection insurance (PPI) claims over the past decade, a scandal that ultimately cost the banking industry around £50 billion.
Amid mounting pressure, Barclays has filed for a judicial review against a FOS decision from earlier this year, though legal experts suggest the bank’s chances of success are slim. The Court of Appeal ruling has set a high bar, asserting that full disclosure of commission arrangements is mandatory and cannot be left to small-print disclaimers.
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The Financial Conduct Authority (FCA), caught off guard by the scale of the claims and the FOS’s pro-consumer stance, has temporarily suspended certain compensation cases to review the issue of broker commissions and determine an appropriate regulatory response. Nikhil Rathi, the head of the FCA, recently remarked on the challenges of the UK’s unique redress landscape, describing it as “a complex system, fuelled by an active claims management sector,” and signalling support for an overhaul.
With this issue hanging over banks, investors have reacted sharply. Following the ruling last month, shares in Lloyds Banking Group fell by 7.4%, and the bank could face a liability as high as £2.5 billion. Analysts at Citigroup have suggested that total claims across the sector could double their initial estimate of £9 billion, should similar cases emerge.
The car finance controversy has highlighted the urgent need for a more transparent and structured approach to consumer redress in the UK, something Reeves is likely to address in her upcoming speech. The Chancellor’s allies suggest she is keen to prevent the current situation from escalating into a crisis reminiscent of the PPI scandal, where unchecked compensation claims spiralled into an industry-wide financial burden. Her proposed reforms would aim to give clearer guidance to both consumers and businesses, creating a more predictable landscape for financial compensation.
Reeves has indicated that her goal is not only to protect consumers but also to provide businesses with stability, in line with her pledge for a single annual fiscal event, which she says will allow for “a strategic approach that gives certainty and allows long-term planning.” Nonetheless, as the car finance case unfolds, the Chancellor’s ability to balance consumer protection with regulatory stability will be put to the test.
