REG - Financial Conduct - FCA motor finance redress scheme consultation

Commonwealth Bank of AustraliaAnnouncement

07/10/2025 17:45

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RNS Number : 4364C  Financial Conduct Authority  07 October 2025

 

FCA consults on motor finance compensation scheme

 

We are consulting
(https://www.fca.org.uk/publication/consultation/cp25-27.pdf) on an
industry-wide scheme to compensate motor finance customers who were treated
unfairly between 2007 and 2024.

 

A compensation scheme is the best way to ensure consumers who have lost out
receive fair compensation in an orderly, consistent, quick, and efficient way,
while ensuring a well-functioning and competitive motor finance market.

 

An alternative to a compensation scheme would require consumers to complain to
firms, then to the Financial Ombudsman Service if dissatisfied with the firm's
response, or through the courts. This would result in significantly higher
administrative and legal costs for firms and consumers, lengthy delays and
uncertain outcomes for all involved.

 

Why are we proposing a scheme?

 

Many firms broke laws and regulations in force at the time by failing to
disclose important information. Our extensive review, covering data from 32m
agreements, found widespread failures to adequately disclose the existence and
nature of commission and contractual ties between lenders and brokers.

 

Of the agreements reviewed involving a discretionary commission arrangement
(DCA) - where the broker could adjust the interest rate offered to a customer
to obtain a higher commission - there was no evidence that the customer had
been told about the DCA.

 

On 1 August 2025, the Supreme Court found a lender acted unfairly - and
therefore unlawfully - because of the high, undisclosed commission paid to the
broker and the failure to disclose a contractual tie. On 17 December 2024, the
High Court ruled that the Financial Ombudsman was entitled to find that a
dealer and lender did not adequately disclose a discretionary commission
arrangement and that meant the relationship between the lender and the
borrower was unfair.

 

Inadequate disclosure means consumers were unable to make informed decisions
and less likely to negotiate or shop around. Consequently, many may have
overpaid on car finance.

 

There is now sufficient legal clarity to move ahead with a compensation
scheme.

 

Scope and design of redress scheme

 

The scheme would cover regulated motor finance agreements taken out between 6
April 2007 and 1 November 2024 where commission was payable by the lender to
the broker.

 

The Financial Ombudsman and courts consider complaints from 6 April 2007 and
therefore firms' liabilities arising from their breaches of the law and
regulation already exist. The end date is based on when we know firms moved to
more transparent practices following the Court of Appeal judgment on 24th
October 2024 that was subsequently appealed to the Supreme Court.

 

The majority of motor finance agreements will not qualify for compensation. We
estimate 14.2m agreements - 44% of all agreements made since 2007 - will be
considered unfair because they involve inadequate disclosure of one or more of
the following:

 

·    a discretionary commission arrangement

·    high commission (where the commission is equal to or greater than 35%
of the total cost of credit and 10% of the loan)

·    contractual ties that gave a lender exclusivity or a right of first
refusal.

 

Our 35%/10% threshold is the point at which our analysis best indicates that
borrowing costs may have been more strongly affected by the commission, such
that its size would likely to have been a major consideration in the
consumer's mind had they been aware of it when they took out the loan. We are
inviting feedback on the proposed definition of high commission for the scheme
and providing data on alternative thresholds.

 

We make clear that these thresholds are solely for the purpose of the design
of this redress scheme and should not be read across to any other retail
financial services market.

 

We propose enabling lenders to rebut the presumption of unfairness in some
limited circumstances.  For example, lenders would be entitled to determine
there was no unfair relationship under the scheme if:

 

·    there is evidence of adequate disclosure of the relevant arrangement
in question, or

·    in cases only featuring a DCA, the lender can provide evidence that
the broker selected the lowest interest rate at which they would not have made
any additional commission, or

·    disclosure of the relevant arrangement in question was inadequate,
but the lender can provide evidence that the consumer was sufficiently
sophisticated to have nonetheless been aware of the relevant feature(s).

 

Furthermore, those with a motor finance complaint about inadequate disclosure
of a commission or tie that doesn't involve one of the three features above
would therefore not receive compensation under the scheme. They would have the
right to test this with the Financial Ombudsman, but would only get a
different outcome if it decides the scheme rules weren't followed. They could
still make a claim in court.

 

Opt in / opt out

 

We estimate there are already just over 4 million complaints with firms.  We
propose lenders contact consumers who complained before the scheme starts
within 3 months. They will be included in the scheme unless they opt out.  If
consumers opt out of the scheme, they cannot opt back in.

 

Consumers who have not complained when the scheme starts would be contacted
within 6 months, where lenders can identify them, and asked if they would like
to opt-in.

 

Any consumers who have not been contacted can ask their firm to review their
case at any time within one year of the scheme start date. We will run an
advertising campaign to raise awareness of the scheme.

 

Consumers who have already been compensated for complaints covered by the
scheme would be excluded. The Financial Ombudsman will resolve complaints they
have already received and not through the scheme. Consumers who have had their
complaints rejected and not taken them to the Financial Ombudsman will be
contacted by lenders and invited to opt in.

 

While many complaints have been paused since 11 January 2024, and others from
December 2024, firms have still been required to progress investigations of
complaints.  When the scheme goes live, we expect firms to resolve promptly
those complaints they already have - so customers who have already complained
are likely to have their case dealt with sooner.

 

Redress calculation

 

We propose that compensation is calculated in a way which balances the Supreme
Court's approach and our evidence of consumer loss, to provide fairness and
consistency.

 

The Johnson case considered by the Supreme Court was a very serious case and
we do not think that courts would necessarily award the same high level of
compensation in all motor finance cases.  But consumers whose cases align
closely with the Johnson case would under the scheme receive the commission
plus interest. We define these as cases involving an undisclosed contractual
tie and commission equal to, or greater than, 50% of the total cost of credit
and 22.5% of the loan. These serious cases will be relatively rare.

 

For all other cases, we propose consumers are compensated the average of what
we estimate they have overpaid, or lost, and the commission paid, plus
interest.

 

Our estimation of loss is based on economic analysis, drawing on independent
statistical advice, that there was a difference in the interest rate charged
on loans with discretionary commission arrangements compared to those with
flat fee arrangements. For example, it is estimated that a loan with an
interest rate of 10% charged to the consumer should have carried a
market-adjusted interest rate of 8.3% (an adjustment of 17%). We believe we
can also use this estimation as a reasonable proxy for losses in the
relatively small number of non DCA cases covered by our scheme that do not
align closely with the Johnson case.

 

We consider the average of the two approaches as the fairest way to reflect
the Courts' judgments and our legal obligation to consider evidence of loss.
We welcome feedback on our proposed approach and provide data on alternative
approaches in the consultation.

 

Interest

 

We propose that simple interest should be paid on the compensation, based on
the annual average Bank of England base rate per year plus 1% from the date of
overpayment to the date compensation is paid. Consumers will be able to
challenge this with evidence if they feel this is unfair. We now estimate the
weighted average interest rate payable will be 2.09% and have used this for
modelling purposes.

 

Total cost of redress

 

We estimate around 85% of eligible consumers would take part in the scheme,
which would mean estimated redress of £8.2bn (including interest). This
estimate of 85% is based on participation rates in past redress schemes and
our consumer research which shows 14% of past and current motor finance
holders do not intend to make a claim. In the very unlikely event of 100%
take-up, firms would owe up to £9.7bn in redress. And if there was a lower
70% take up, the redress owed would be £6.8bn. If there is 85% take-up of the
scheme, the estimated costs to firms of implementing and operationalising the
scheme would be £2.8bn, taking the total cost to £11bn.

 

We estimate that this would result in consumers being compensated an average
of around £700 per agreement.

 

Inevitably, given the scale and complexity of such a scheme and limitations in
the data we have spanning such a long time period, the estimates remain highly
indicative and susceptible to change. The consultation sets out the details
underpinning these estimates and an accompanying cost-benefit analysis (CBA),
reviewed by our independent CBA panel, as well as sensitivity analysis which
means estimates could in some circumstances be either higher or lower.

 

Many firms have raised the possibility of highly automated approaches to
paying compensation and we will work closely with them on these and this may
help reduce estimated non-redress costs. We will continue to refine all our
estimates during the consultation as we receive more precise data and will
publish updated estimates alongside our final rules.

 

Market impact

 

The motor finance market continues to function well, including after the
Supreme Court judgment and our announcement of an intention to consult on a
scheme on 3 August 2025. Our detailed analysis concludes there will continue
to be good product availability and competition among lenders in the finance
market for new and used vehicles. While we cannot rule out some modest impacts
on product availability and prices, we estimate the cost of dealing with
complaints would be several billion pounds higher in the absence of a redress
scheme. In that scenario, impacts on access to motor finance and prices for
consumers could be significantly higher with uncertainty continuing for many
more years.

 

We have heard concerns about the impact of paying redress on non-bank,
non-captive lenders focused on non-prime markets. Some of these lenders are
smaller and have less access to funding than larger motor finance firms
focused on other parts of the market. Access to funding for such non-prime
lenders had been a challenge even before the motor finance commissions issue
became prominent.

 

Some non-prime lenders have told us they did not engage in discretionary
commission or tied arrangements. If that is the case, they are less likely to
have to pay redress under the scheme.

 

These lenders may also be able to rebut the presumption of loss or

damage proposed at the liability assessment stage if they have clear evidence
that the consumer would not have secured a better offer from any other lender
the broker had arrangements with at the time of the transaction.  If the
presumption of loss or damage is rebutted, the lender would not have to pay
any redress to the consumer.

 

While these non-prime lenders represent a small share of the overall motor
finance market, we will remain vigilant to the effect on them as the
consultation progresses and as we make final rules.

 

Complaints deadline

 

We are also consulting on extending the deadline for firms to send a final
response to certain motor finance complaints to 31 July 2026. This will help
ensure consistent and orderly outcomes for consumers and minimise disruption
to firms and the market. We may shorten the period to align with the timetable
of our compensation scheme if confirmed.

 

We propose no extension to handling complaints about leasing agreements as
they are not caught by the legislation relating to unfair relationships and so
are not covered by the scheme. Firms need to start sending final responses to
any motor leasing complaint from 5 December 2025.

 

Our expectations of firms

 

We propose that lenders deliver the scheme, rather than brokers. This will be
simpler and ensure more timely and comprehensive redress, given there are many
more brokers than lenders. Brokers played a part in the failings and will have
to cooperate, providing information lenders need to operate the scheme
promptly.

 

We have written to motor finance lender and broker CEOs
(https://www.fca.org.uk/publication/dear-ceo-letters/motor-finance-action-lenders-brokers.pdf)
, outlining the preparatory steps we expect them to take now, as well as when
the scheme starts.

 

We would expect firms to:

 

·    accurately identify and effectively contact impacted consumers (with
support from third parties where required)

·    gather information to assess whether cases are in scope of the scheme
and liability (with support from brokers as required) and reach appropriate
decisions

·    ensure compensation calculations are accurate, and payments are made
quickly

·    ensure no undue delay at any stage of the proposed redress scheme

 

The principles underpinning a redress scheme

 

In designing this proposed scheme, we have sought to balance key principles so
that the scheme would:

 

·    Be simpler for consumers than bringing an individual complaint,
meaning more consumers, particularly vulnerable ones, receive compensation
they are owed.

·    Provide timely and fair compensation to consumers, with clear
communication about how their claim is being dealt with, as we will set rules
firms must follow and will act if they don't.

·    Be comprehensive so consumers do not need to go through the courts to
secure compensation.

·    Be free to access for consumers and cost effective for firms. Without
a scheme, many cases would go through the courts or the Financial Ombudsman,
resulting in significantly higher administrative costs for firms and lengthy
delays.   Consumers do not need to use a claims management company or law
firm to make a claim. We set out on 6 October 2025 how we have joined forces
with other regulators to deal with some poor claims management practices
(https://www.fca.org.uk/news/press-releases/regulators-join-forces-tackle-poor-claims-management-practices)
.

·    Protect the integrity of the market. Our analysis shows the motor
finance market will continue to function well, as it has been since we
announced our intention to propose a scheme, and will continue to attract
investment, with limited disruption to competition.  We continue to monitor
securities and funding markets for motor finance firms, and these remain
orderly and functioning.

·    Give affected consumers certainty that they have had the opportunity
to secure compensation, and firms and investors finality by drawing a line
under this issue.

 

To achieve this balance on such a complex issue has required us to make
regulatory judgments on trade-offs. We recognise that not everyone will get
everything they would like from a scheme. We welcome views on our proposals
and potential alternatives. This feedback will enable us to further enhance
our evidence base, assumptions and estimates to ensure a robust and
operationally effective scheme. Our aim is to resolve this matter as quickly
as possible, in the interest of consumers, firms, the long-term health of the
market and investors.

 

Next steps

 

We are seeking comments on extending the complaint handling rules by 4
November 2025.

 

The consultation on the proposed redress scheme closes on 18 November 2025.

 

If we introduce a redress scheme, we expect to publish our policy statement
and final rules by early 2026. This timetable depends on the feedback we
receive and firms and other parties working constructively together and with
us. The scheme would launch at the same time, with consumers starting to
receive compensation later in 2026.

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