FCA motor finance redress scheme consultation

FCA consults on motor finance compensation scheme

We are consulting 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, 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.

·    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.