The London (re)insurance market has warned plans to compensate UK motorists after insurance mis-selling has the potential to create a dangerous precedent.

The International Underwriting Association has said the proposed scheme to compensate motor finance customers who were treated unfairly is disproportionate and too broad.

While the association said it strongly agrees with the need to pay consumers that were mistreated under credit arrangements. However, the redress arrangements put forward by the Financial Conduct Authority (FCA) go beyond this.

“They would, indeed, lead to compensation being paid in cases where unfairness has not been demonstrated or even where a loss may not have been suffered,” it added. “Cases would also be settled where time has already expired to bring a claim.”

The IUA’s comments came in response to an official FCA consultation exercise. They were developed with members providing financial and professional lines insurance to companies involved in the redress scheme. A roundtable discussion was hosted by the association before a comprehensive response was drafted representing insurers’ views.

Earlier this month the FCA announced that payments to those motorists who fell within the scheme will start in May next  year and businesses needed to be ready.

The FCA said around 14 million motorists would receive around £700 per agreement, on average. Based on the number of consumers the FCA estimates could take part in the scheme, lenders could pay out £8.2 billion in compensation.

It added motor finance companies broke laws and regulations in force at the time by failing to disclose important information. This led to unfairness, with consumers denied the chance to negotiate or find a better deal and, in some instances, paying more for their loan.

Nikhil Rathi, chief executive of the FCA, said: “Many motor finance lenders did not comply with the law or the rules. Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.

“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated. On such a complex issue, not everyone will get everything they would like. But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”

The FCA added under the scheme people will only receive compensation if they weren’t told details of at least one of 3 arrangements between the lender and the broker who sold the loan, often a car dealer, which are found in some motor finance agreements:

1. A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.
2. A high commission arrangement (35% of the total cost of credit and 10% of the loan).
3. A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.

Joe Shaw, IUA director of claims, said: “We fully support the need to ensure that consumers who were subject to unfair credit arrangements are paid redress and that all legal liabilities are fairly settled.

“Our concern is that the proposed scheme represents regulatory overreach. It sets out a universal application of unfairness to a type of arrangement that was not legally proscribed at the time. The test for unfairness is based entirely on the nature of the disclosure process and there is no consideration of a range of other factors that would determine whether a customer had been treated unfairly or not.

“It is an important question since, if the scheme goes ahead as proposed, it could set a precedent for future similar cases.”

The FCA said around 14 million motorists would receive around £700 per agreement, on average. Based on the number of consumers the FCA estimates could take part in the scheme, lenders could pay out £8.2 billion in compensation.