FCA to consult on motor finance redress scheme

FCA to consult on a compensation scheme for motor finance customers

We will consult on an industry-wide scheme to compensate motor finance customers who were treated unfairly.

Any redress scheme must be fair to consumers who have lost out and ensure the integrity of the motor finance market, so it works well for future consumers.

We will publish the consultation by early October and finalise any scheme in time for people to start receiving compensation next year.

Why are we proposing a redress scheme?

Our detailed review of the past use of motor finance has shown that many firms were not complying with the law or our disclosure rules that were in force when they sold loans to consumers. Where consumers have lost out, they should be appropriately compensated in an orderly, consistent and efficient way.

Some consumers have challenged their agreements with lenders through the courts. On Friday the Supreme Court ruled that in many cases commission payments could be legal, but a lender did act unfairly - and therefore unlawfully - due in part to the size of the commission it paid to the motor dealer and how it was disclosed.

The Supreme Court agreed with several factors we had identified which could point towards an unfair relationship and fall foul of the Consumer Credit Act (CCA), whilst recognising it depends on the facts of each case.

Such factors could include:

·    the size of the commission relative to the charge for credit

·    the nature of the commission, for example, whether it is discretionary

·    the characteristics of the consumer

·    compliance with regulatory rules

·    the extent and manner of disclosure

This clarity helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts.

We will now consult on a redress scheme. Redress would depend on non-disclosure of the factors above and the interaction between them.

The principles underpinning a redress scheme

We set out in June the principles that would guide a redress scheme. These are:

·    comprehensiveness

·    fairness

·    certainty

·    simplicity and cost effectiveness

·    timeliness

·    transparency

·    market integrity

There may be tensions between these principles, which will require us to strike the right balance. We will explore these during the consultation.

Scope and design of redress scheme  

We have been carefully analysing the Supreme Court's judgment and how it may affect the scope and structure of a redress scheme. While that work is ongoing, we want to provide as much clarity and certainty to consumers and firms as quickly as possible.

Our consultation will cover how firms should assess whether the relationship between the lender and borrower was unfair for the purposes of our scheme and, if so, what compensation should be paid.

In the Supreme Court case and our review of past practices, the unfairness to consumers has arisen from the non-disclosure of particular features of the commission arrangements. But many of these features are not themselves unfair. And the Supreme Court said that non-disclosure or partial disclosure of the commission will not necessarily make the relationship unfair.

Our consultation will, therefore, need to consider how a range of factors must be assessed together when deciding on whether the relationship was unfair. As we prepare the consultation, we will consider if and how factors such as the non-disclosure of the nature and size of the commission, tied commercial relationships and customer sophistication should be factored in.

Discretionary commission arrangements and non- discretionary commission arrangements

We will propose that the scheme covers discretionary commission arrangements (DCAs) - where the broker could adjust the interest rate offered to a customer - if they were not properly disclosed.

We will also consult on which non-discretionary commission arrangements should be included. This is because the Supreme Court decision in the Johnson case, which did not include the payment of any discretionary commission, makes clear that non-disclosure of other facts relating to the commission can make the relationship unfair.

Redress calculation

Our methodology for calculating redress will be informed by the degree of harm suffered by the consumer and the need to ensure consumers continue to be able to access affordable loans for motor vehicles.

The Supreme Court decided that the appropriate remedy in the Johnson case was the payment of the commission. We will consider this option alongside alternative approaches. It is unlikely any alternative would lead to higher remedies overall than full repayment of commission. Some could lead to lower payments.

We will consult on whether there should be a de minimis threshold to be eligible for a compensation payment.

Interest

Interest is normally paid on redress awards. This should be fair and proportionate. In the case it upheld, the Supreme Court required a commercial rate of interest to be paid.

We plan to consult on an interest rate for each year of the scheme based on the average base rate that year plus 1%. This would be in the ballpark of a simple interest rate of 3% per annum.

Timeframe  

We think the scheme should cover agreements dating back to 2007, to be consistent with the complaints the Financial Ombudsman can consider and to ensure the scheme is comprehensive.  This would mean consumers would not need to use other routes to secure compensation and prevent large numbers of ongoing disputes in the courts. We are discussing with the Government the best way of doing this. 

Opt in / opt out

We have not yet decided whether to propose an opt-in or opt-out scheme. There are pros and cons to either approach and a range of views, which will be explored thoroughly through the consultation.

Whichever approach we propose, we anticipate requiring firms as far as possible to make customers aware they may be eligible and what they may need to do.

High commission

The Supreme Court found that a high and undisclosed commission - in this case 55% of the total cost of the credit - was 'a powerful indication' of an unfair relationship. The court also found that this was a breach of our rules, as disclosure of so high a commission would have had a 'material impact' on the customer's decision.

We will, therefore, need to consider what size of commission in the context of the overall finance arrangements may point towards unfairness if not disclosed.

Total cost of redress 

The final cost of any redress scheme will depend on the final design and the factors, including those set out above. 

This makes it hard to estimate precisely at this stage the total cost to industry of the scheme. Any estimates are highly indicative and susceptible to change.

The final cost will also depend on the take-up rate, the methodology to calculate redress and the mix of discretionary and non-discretionary arrangements ultimately included. 

At this stage, we think it is unlikely that the cost of any scheme, including administrative costs would be materially lower than £9bn and it could be materially higher.  While there are plausible scenarios which underpin estimates of a total cost as high as £18bn, we do not consider those scenarios to be the most likely and analyst estimates in the mid point of this range are more plausible. 

The FCA currently estimates that most individuals will probably receive less than £950 in compensation per agreement.

Market impact 

We have been analysing the potential impact of a redress scheme on firms and the motor finance market. We expect a healthy finance market for new and used cars to continue notwithstanding any redress scheme we propose. We will set out more detailed analysis in our consultation and continue to monitor market functioning. 

Advice to firms

Firms must comply with the law and our rules. We also welcomed the industry-led practices to enhance the information provided to customers following the Court of Appeal judgment of 25 October 2024 on motor commission arrangements. Under the Consumer Duty, we increasingly monitor outcomes consumers are receiving as well as compliance with rules.  Our view is that these updated practices are contributing to better consumer outcomes.

Prudential rules require regulated firms to maintain adequate financial resources. Firms with listed securities must also keep the market properly informed. Each firm must make their own assessment of potential liabilities, as many have done.

Firms should now refresh their estimates, ensuring they cover both liability for compensation and the administrative costs. There will remain a degree of uncertainty about these estimates until a redress scheme is finalised, but it is important that firms act and make sufficient provisions, increasing them where necessary.

Complaints deadline

Firms currently do not have to provide a final response to relevant motor finance complaints before 4 December 2025. We will consult on further extending this deadline to align with the timetable for compensation payments of the proposed redress scheme. 

This will prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market.

Advice to consumers

People who have already complained don't need to do anything. Our advice remains that consumers concerned that they were not told about commission and who think they may have paid too much for the finance, should complain now.

We aim to make any scheme easy to participate in, without needing to use a claims management company (CMC) or law firm. Using a CMC or law firm may end up costing them up to 30% in fees of any compensation they receive.

Over the last year, the FCA has required 225 promotions from CMCs on motor finance to be amended or withdrawn, including some which were highly speculative in suggesting the compensation consumers may get.

We will continue to act against firms using clickbait-style promotions or language that suggests a guaranteed outcome before any investigation into a consumer's claim has taken place. Firms must ensure that all financial promotions are clear, fair, and not misleading, and that they accurately reflect the nature and status of any potential claims.

We will ensure firms handle claims consistently, efficiently and fairly.

Next steps

We recognise that consumers want to receive any compensation owed quickly and firms and investors want certainty.

We will be working intensively and engaging widely over the coming weeks on the detail of how a scheme would work.

We aim to publish the consultation by early October and for it be open for 6 weeks. No final decisions have yet been taken in relation to the scheme.  We aim to finalise the rules such that the scheme can launch in 2026, with consumers starting to receive compensation next year.