Timely insights into the design of mass consumer redress schemes

In R (All-Party Parliamentary Group on Fair Banking) v Financial Conduct Authority [2025] EWHC 525 (Admin), the High Court examined the FCA’s decision regarding the exclusion of certain customers from the scope of the voluntary Interest Rate Hedging Products (IRHP) redress scheme established in 2012, which was criticised in a subsequent independent review. The case contains important insights into the trade-offs involved in the design of such schemes, given the high likelihood that the FCA will soon be rolling out a redress scheme to deal with motor finance mis-selling.

Background

From 2010 onwards, large numbers of complaints began to be made about mis-selling of IRHPs alongside small and medium sized business loans. The IRHPs, which typically swapped floating for fixed interest rates, had become ruinously expensive for many bank customers after interest rates fell sharply during the 2008 financial crisis. Following supervisory intervention by the FSA (the predecessor of the FCA), a voluntary redress scheme was negotiated with various large banks in 2012. The scheme incorporated a “sophistication test”, which excluded customers that exceeded certain objective metrics or were otherwise sophisticated in the use of financial products from being eligible to receive compensation under the scheme for mis-sold financial products.

Subsequently the FCA committed to a review of its supervisory intervention on IRHPs by a leading King’s Counsel. That review concluded (among other things) that the FCA should not have excluded a subset of customers from the scheme via the sophistication test. The FCA disagreed with these findings and decided to take no further action to address that conclusion. The All-Party Parliamentary Group on Fair Banking challenged this exclusion by way of judicial review proceedings, arguing that the FCA’s decision was irrational and procedurally unfair due to a lack of proper consultation with stakeholders.

The FCA argued that it was on balance right (or at least not irrational) to agree the redress scheme incorporating the sophistication test for a number of reasons including that:

• There was real urgency to provide prompt assistance to a large number of small businesses that were in distress and prone to going into insolvency as a result of payments required under their IRHPs.
• In this context there were significant advantages to a voluntary scheme over use of the FSA’s mandatory s.404 redress powers, which would be slower and more complex to implement, and prone to protracted challenge from the banks involved.
• There were reasons for concern that the evidential challenges to the FSA of bringing action to require redress could not be overcome, resulting in worse outcomes all round.
• The scheme delivered fair outcomes for those within its scope and the FSA was entitled to prioritize those customers.
• The incorporation of the sophistication test followed intensive and robust negotiation with the banks and necessarily involved the need to make trade-offs to achieve the best overall result possible. There was no reason to believe that a better outcome could have been negotiated voluntarily with the banks.
• Ultimately the scheme led to c.£2.2 billion being paid in redress in respect of 20,206 IRHP sales, with costs to the banks of c.£920 million.

Court’s Findings

The High Court rejected the challenge to the manner in which the FCA had exercised its discretion not to seek to require further redress to be paid to sophisticated customers excluded from the voluntary scheme, holding that:

• Rational Basis: The FCA had a rational basis for its decision. The bar for irrationality is a high one and it was not irrational for the FCA to disagree with the conclusions of the independent review on the basis of a reasoned consideration that it conducted. There was no presumption that a public body in the position of the FCA should follow the recommendations of the independent review absent a good, very good, or cogent reason.
• No Duty to Consult: The FCA was not legally obliged to consult stakeholders before making its decision regarding the exclusion criteria.
• Regulatory Discretion: The FCA’s actions were within the scope of its regulatory authority and aligned with its statutory purpose of consumer protection. The FCA is afforded a wide measure of discretion as to when and how it will intervene to address potential mis-selling, having regard to its statutory objectives, regulatory principles and regulatory priorities. It could not be said to have misunderstood or misapplied that discretion in acting as it did.

Implications

This judgment reinforces the principles that regulatory bodies like the FCA have broad discretion in designing and implementing redress schemes (whether voluntary or compulsory, especially when balancing regulatory priorities, and the need for timely action, against the complexities of individual cases. Its decisions in such circumstances will not be lightly overturned by the courts. The judgment also shines a light into the decision-making processes of the regulator and the trade-offs that are made when negotiating such schemes. Those insights are worth considering at a time when another mass consumer redress scheme in relation to motor finance mis-selling is highly likely in the coming months, the design of which will inevitably involve similar issues.