REG - Financial Conduct - FCA: key considerations for a redress scheme

Commonwealth Bank of AustraliaAnnouncement

05/06/2025 08:15

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RNS Number : 5860L  Financial Conduct Authority  05 June 2025

Key considerations in implementing a possible motor finance consumer redress
scheme

 

We're setting out some of the things we need to consider if we were to
introduce a redress scheme as part of our review into motor finance commission
arrangements.

 

Our review

 

More than 2 million used and new vehicles are bought using motor finance each
year. We want to make sure the motor finance market functions well, with
effective competition, so consumers can get a fair deal.

 

Before January 2021, some motor finance lenders allowed brokers (usually car
dealers) to adjust the interest rates on financing deals offered to customers.
The higher the interest rate, the more commission the broker received. This
was known as a discretionary commission arrangement (DCA), and we banned this
practice in the motor finance market in 2021.

 

There have since been a high number of complaints from customers about firms
failing to disclose details about commission arrangements before the ban.
Firms were rejecting most of these complaints, because they believed they
haven't acted unfairly and haven't caused customers to lose out.

 

In 2024, the Financial Ombudsman Service considered some complaints rejected
by firms and found in favour of complainants in 2 key decisions involving DCAs
[see the first decision
(https://www.financial-ombudsman.org.uk/decision/DRN-4188284.pdf) and second
decision (https://www.financial-ombudsman.org.uk/decision/DRN-4326581.pdf) ].
We expected these decisions to trigger an increase in complaints.

 

In January 2024, we stepped in to investigate
(https://www.fca.org.uk/news/statements/fca-undertake-work-motor-finance-market)
the use of DCAs in the motor finance market before they were banned in 2021.

 

When we announced our review, we extended the deadline for motor finance firms
to provide a final response to relevant customer complaints. This was to
prevent disorderly, inconsistent and inefficient outcomes for consumers and
knock-on effects on firms and the market while we assessed the issue.

 

Court of Appeal decision and Supreme Court appeal

 

The Court of Appeal decided it was unlawful in the circumstances of 3 cases
for the car dealers to receive a commission (whether discretionary or a fixed
percentage) from lenders providing motor finance without giving the customer
sufficient information about the commission and getting their informed consent
to the payment.

 

We've since expanded our review and extended the time firms have to respond to
any relevant motor finance commission complaints to December 2025, following
this decision by the Court of
(https://www.fca.org.uk/firms/information-firms-motor-finance-complaints/communicating-customers-commission#section-summary-of-the-court-of-appeal-s-decision)
(https://www.fca.org.uk/firms/information-firms-motor-finance-complaints/communicating-customers-commission#section-summary-of-the-court-of-appeal-s-decision)
Appeal
(https://www.fca.org.uk/firms/information-firms-motor-finance-complaints/communicating-customers-commission#section-summary-of-the-court-of-appeal-s-decision)
in October 2024. This includes where there was no discretionary commission
agreement in place.

 

The Supreme Court heard
(https://www.supremecourt.uk/cases/uksc-2024-0157#watch-hearings) an appeal
(https://www.supremecourt.uk/cases/uksc-2024-0157#watch-hearings) in relation
to the Court of Appeal decision in April 2025.  We made submissions
(https://www.fca.org.uk/publication/corporate/fca-written-submissions-10-march-2025.pdf)
to assist the Supreme Court. The Court has indicated that they aim to deliver
their judgment in July 2025.

 

Potential consumer redress scheme

 

In March 2025
(https://www.fca.org.uk/news/statements/motor-finance-review-next-steps) , we
said that if, following the outcome of the Supreme Court judgment, we conclude
motor finance consumers have lost out, it's likely that we'll consult on an
industry-wide consumer redress scheme.

 

Under a redress scheme, we would set rules for how firms assess claims and
calculate redress, and we would put checks in place to ensure they are
following the rules.

 

We would aim to make any scheme easy for consumers to understand and
participate in, without needing to use a claims management company (CMC) or
law firm.

 

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 having to pay up to 30%
in fees out of any award they may receive.

 

There are legal tests that must be met to introduce any redress scheme. It
must appear to us that there has been a widespread or regular failure to
comply with requirements such that:

 

á    Consumers have suffered (or may suffer) loss or damage for which a
court would grant a remedy or relief, and

á    We consider it desirable to establish a consumer redress scheme
compared to other routes by which consumers could obtain redress.

 

Seeking views from stakeholders

We've been speaking with consumer groups, firms and industry trade bodies to
get their views on important issues to consider if we do introduce a redress
scheme.

If we do decide to propose a redress scheme, we'll publish a consultation
setting out why we think it's the right thing to do and how it could work.

It's not possible to predict the outcome of the Supreme Court's judgment, but
we're engaging with stakeholders now and providing this update because we want
to be able to act as quickly as possible once the Supreme Court has made its
judgment, so we can start to bring greater certainty for affected consumers,
firms and investors. For example, given the pre-consultation engagement, we
may decide to have a shorter than normal consultation window (for example, 6
weeks).

Principles
(https://www.fca.org.uk/publication/information-sheets/principles-motor-finance-consumer-redress-scheme.pdf)
of a redress scheme

 

In designing a redress scheme, we would be guided by principles, including:

 

1. Comprehensiveness - cover as wide a range of complaints as possible so
consumers don't have to go elsewhere, like court.

2. Fairness - ensure the approaches to determining breaches and calculating
redress are fair to consumers and firms.

3. Certainty - give consumers and firms finality.

4. Simplicity and cost-effectiveness - easy for consumers to participate in
and the cost of delivering the scheme should be proportionate for firms.

5. Timeliness - resolve the majority of claims within a reasonable timeframe.

6. Transparency - consumers should receive clear explanations of decisions and
data highlighting the progress of the scheme should be publicly available to
provide confidence.

7. Market integrity - support the ongoing, long-term availability of high
quality, competitively-priced motor finance.

 

There may be tensions between some of these principles, which will require us
to consider how to strike the right balance. For example, if we seek to make a
redress scheme comprehensive and ensure a wide range of affected consumers are
included, it may mean consumers have to wait longer for redress because there
are more claims to process.

 

Views from everyone who responds to the consultation will be vital in helping
us get this balance right.

 

Scope of a redress scheme

The features we'd have to consider when designing a redress scheme.

 

Opt-in or opt-out

 

Under an opt-in redress scheme, customers would have to confirm to their firm
by a certain date that they wish to be included.

 

An opt-in approach can be challenging. While we would seek to make it as easy
for people as possible, some consumers may be unsure which firms they had
agreements with.

 

Under an opt-out redress scheme, customers are automatically included unless
they opt out.

 

An opt-out scheme is likely to be simpler for consumers and could reduce
speculative claims. But for firms, it could be more expensive and take longer
to implement, particularly if customers have changed address.

 

How firms should calculate redress

 

We've seen a range of redress rates suggested. This includes some highly
speculative figures by some CMCs and law firms.

 

Some estimates have been calculated based on Financial Ombudsman decisions.
 We may take a different approach to calculating redress in any intervention
we make. We're required to take a broad view that takes into account all our
statutory objectives. This will include considering all the evidence we've
gathered and the Supreme Court judgment to determine whether and how far
consumers may have lost out.

Any redress scheme must:

 

á    Be fair to consumers who've lost out.

á    Ensure the integrity of the motor finance market, so it works well
for future consumers.

 

If many firms were to go out of business or withdraw from the market, this
could reduce competition and could make it more expensive for consumers to
borrow money to buy a car in the future. Where firms fail, customers may not
get any redress, as motor finance isn't covered by the Financial Services
Compensation Scheme.

Have your say

If you have feedback on the key principles we would use to design a redress
scheme or aspects of its scope, please email motorfinance@fca.org.uk.

Next steps

We'll confirm within 6 weeks of the Supreme Court judgment whether we're
proposing to introduce a redress scheme. If so, we'll also set out timings for
when we would issue a consultation.

Our consultation would set out detailed proposals for how a redress scheme
would work in practice alongside draft rules, including the proposed timings
for when a redress scheme would be implemented. It would include a cost
benefit analysis (CBA) scrutinised by our CBA Panel of external experts.

Following the consultation, we'd confirm whether we're going ahead with a
redress scheme, and if so, what the final rules are. The final rules would set
out when firms need to implement the scheme, which we would expect, subject to
consultation, to be in 2026.

We will also keep under review the rules in our Handbook we have for motor
finance firms and will announce soon after the judgment if we propose any
changes.

 

 

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