Consumer alert as ‘no-win, no-fee’ firms get set for car finance scandal ruling

Consumers caught up in the motor finance scandal risk losing nearly a third of any redress as a result of signing up to unscrupulous compensation claim schemes, legal and financial watchdogs have warned.

The Financial Conduct Authority (FCA) and Solicitors Regulation Authority (SRA), which oversee claims management companies (CMCs) and law firms, issued a joint warning to the industry over “poor practices” and alerting consumers they could see up to 30 per cent of cash they receive in redress, vanish in fees.

The warning comes on the eve of a Supreme Court judgment which has reviewed a landmark Appeal Court ruling which ruled in favour of three car buyers who claimed that hidden commissions on their car purchase deals unlawfully added thousands of pounds to the cost.

The ruling, which has been appealed by the car finance firms, is being closely watched by banks, financial services firms and the car industry as well as regulators and the Treasury for fear it could undermine vitally important commercial sectors.

Millions of motorists could be in line for compensation payouts if the Supreme Court justices decide buyers were mis-sold finance agreements when buying a car. Last year HSBC estimated the car finance scandal could end up costing lenders £44bn.

The prospect of a compensation bonanza has seen consumers bombarded with ads from so-called “no-win, no-fee” law firms and claims management companies offering to pursue car finance compensation for customers.

The advertising onslaught has troubled regulators and the SRA said it was already investigating 73 law firms over potential breaches of its rules on high-volume claims. “Where we find cases where firms are not acting in the best interest of their clients, we will investigate and take action,” said Paul Philip, SRA chief executive.

The FCA said it has also required 224 car loan redress ads to be amended or withdrawn in the past year.

Both watchdogs say they expect law firms and CMCs to tell people of the existence of a redress scheme which is being considered by the FCA, or where there is a realistic prospect of one being introduced, which would allow people to pursue a claim for themselves, free of charge.

Companies have been warned this must be done before a client signs any agreement. The regulators stressed this applies even if though the redress scheme has not yet been confirmed.

The legal watchdog’s rules require legal firms to make consumers aware of their rights of termination under the agreement, and of any fees they may face if they do not go ahead. The regulators stress that any charges that are applied by law firms or CMCs must be fair and reasonable.

Where a client wants to use a motor finance redress scheme that the FCA introduces, law firms must not lose sight of their duty to act with integrity and in a way that upholds public trust in legal services.

The FCA’s rules require CMCs to inform customers of their right to exit the agreement at any time and any fee that may be payable by them. Any fee must be reasonable and reflect the work actually undertaken.

Submitting a claim through a law firm or CMC can result in consumers sacrificing up to 30 per cent of any award in fees they warned.

The FCA and SRA say they are concerned about the conduct of some law firms and CMCs particularly in the volume and accuracy of marketing matter together with failures to advise potential clients about the availability of free-to-claim alternatives.

They claim companies and law firms have provided “inaccurate or misleading information” on the likelihood of success or potential value of a claim.

Paul Philip, SRA chief executive, said: “We are very concerned about some of the practices we are seeing in the motor finance commission claim market. Law firms have a regulatory duty to act in the best interests of their clients.

“But if they mislead clients, fail to get their explicit consent, do not explain cost information clearly or are not sharing the required information on free alternative routes before signing them up, they are clearly failing to meet their obligations.

“Where we find cases where firms are not acting in the best interest of their clients, we will investigate and take action.”

Sheree Howard, from the FCA, said: “We’ve seen law firms and CMCs advertising highly speculative figures, so we are warning them of our expectations when it comes to drumming up clients for motor finance commission claims. We will take action if we see evidence of poor practice.

“Consumers do not need to use a CMC or a law firm. If we introduce a redress scheme for motor finance, we will aim to make it easy for people to take part.

“Consumers should be aware that by signing up now with a CMC or law firm, they may end up paying for a service they do not need and losing up to 30 per cent of any money they may receive.”

The SRA and FCA said they are working closely together on the issue and will continue to take action where they find evidence of poor practice.