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The Financial Conduct Authority’s (FCA) recent confirmation of a Motor Finance Consumer Redress Scheme represents a significant and complex development for lenders and other stakeholders. While much of the focus to date has centred on whether redress is due and to whom, the question of quantum is likely to prove equally challenging.

It remains to be seen whether such redress liabilities will trigger insurance cover. Questions of coverage and aggregation will, of course, depend on the specific terms of each policy and are ultimately for lawyers to pore over. However, if policies do respond, it is the assessment of quantum that will determine the scale of financial exposure for insurers and their insureds.

The scheme provides motor finance lenders with a mechanism to compensate customers who qualify for redress. The overall cost to firms is driven by two components: redress costs and non-redress costs. Redress costs depend on both the number of eligible customers and the level of compensation due, while non-redress costs reflect the administrative and operational expenditure associated with implementing the scheme.

The FCA has estimated average redress of approximately £700 to £850 per customer, with total costs to firms of £9.1 billion – comprising £7.5 billion in redress payments and £1.6 billion in non-redress costs, highlighting the potential scale of impact on the insurance market should these liabilities fall for cover.

A fairly small cohort of banks are likely to face the largest liabilities. Lloyds, FirstRand, Barclays and Close Brothers have set aside the largest provisions, with FirstRand Bank set to exit the UK’s motor finance industry deeming the scheme “disproportionate and unfair”.

Calculating Redress and Quantum

Clear calculation guidelines have been established, requiring firms to reconstruct what a customer actually paid under their motor finance agreement and compare this with what they would have paid under a fair arrangement. In most cases, compensation will reflect the estimated financial disadvantage, plus interest.

Importantly, the FCA’s methodology requires calculations to be undertaken on an individual basis considering factors such as missed payments, extra fees and payment holidays, rather than a high-level analysis. This significantly increases both the computational burden and the risk of error.

There are three principal methodologies for calculating redress, dependent on the original customer agreements:

• Commission repayment – refunding the commission element (in full or in part) that was embedded within the finance arrangement.
• APR adjustment – recalculating the loan using a “fair” interest rate and refunding the difference between actual and reconstructed payments.
• Hybrid remedy – a blended outcome, typically reflecting an average of the two approaches above.

In practice, lenders must determine which methodology applies to each customer and then apply it consistently across potentially tens of thousands of cases.

For insurers, the implications are clear. Where policies respond, a significant challenge will arise as to whether the quantum presented is accurate, consistent, and justifiable. Without independent scrutiny, there is a risk of inaccurate reserving and/or over-paying claims.

ASL is well placed to provide support in the following areas:

• Assessing calculation frameworks – reviewing whether an Insured’s redress methodology aligns with FCA expectations and is being applied appropriately.
• Validating assumptions and inputs – ensuring that key variables, such as interest rates and commission structures are accurate.
• Testing outputs – performing sample reviews and data analytics to identify anomalies, inconsistencies, or systematic errors in the calculations undertaken.
• Quantifying exposure – supporting accurate reserving by providing an independent assessment of an Insured’s aggregate redress liabilities.

For a scheme of this scale and complexity, robust oversight of quantum will be critical to claims management and maintaining confidence in reserving.