If motorists were ripped off, why should compensation depend on what lenders can afford? writes Dean Dunham KC

What shouldn’t determine the figure is how painful paying that compensation might be for the company responsible.

Yet that’s now at the heart of an extraordinary row over Britain’s motor finance scandal.

The Financial Conduct Authority’s proposed redress scheme is expected to cover around 12 million car finance agreements and cost the industry approximately £9.1 billion.

Average compensation is estimated at around £700 per agreement.

But Consumer Voice, which is challenging the FCA’s approach in the High Court, alleges the regulator deliberately designed the scheme partly to limit the financial impact on lenders.

The FCA disputes that characterisation and says its approach strikes a fair and proportionate balance between compensating consumers and maintaining a functioning motor finance market. Both sides have an important argument.

If compensation were set at such a level that lenders collapsed, competition disappeared and millions of consumers subsequently found it harder or more expensive to finance a car, that wouldn’t exactly be a victory for consumers.

But there’s an equally uncomfortable question.

If a consumer is entitled to compensation because they were treated unfairly, should that compensation be reduced because paying the full amount would hurt the company that treated them unfairly?

Imagine applying that principle anywhere else.

If somebody owed you £5,000 following a court judgment, we wouldn’t normally decide you should receive £3,000 because paying the full amount would be inconvenient for them.

Redress should reflect the consumer’s loss.

Otherwise, we risk creating a dangerous principle: the bigger the scandal and the greater the potential bill, the more justification there is to reduce compensation.

That’s effectively saying a business can become too big to compensate properly.

The FCA has an incredibly difficult balancing act. It must protect consumers while ensuring financial markets continue functioning effectively.

But those objectives cannot become confused.

Consumers should not receive a windfall and lenders should not be punished beyond what is justified.

Equally, compensation shouldn’t be calculated backwards from the number the industry can comfortably afford.

If motorists were treated unfairly, establish their actual loss, apply the law and compensate them accordingly.

Because affordability matters when you’re setting a household budget, it shouldn’t determine the value of somebody’s legal rights.

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Dean Dunham KC presents LBC's Consumer Hour every Sunday from 9pm-10pm.

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