FCA confirms motor finance redress scheme

FCA confirms motor finance redress scheme 

We are going ahead with a scheme to compensate motor finance customers who were treated unfairly.  

Courts have found that firms broke the law by failing to disclose important information to customers. An industry-wide scheme is the quickest and most cost effective way to deliver fair compensation.

We had over 1,000 consultation responses and engaged extensively with consumer groups, professional representatives, firms, manufacturers, investors and industry bodies.  While most respondents supported a scheme, we received much conflicting feedback on its details. 

We have listened and made several changes, set out in detail below, to design a final scheme which strikes the balance between sometimes competing principles such as simplicity and cost effectiveness, comprehensiveness and fairness.   

Our final approach is fair for consumers and proportionate for firms.  

We have tightened eligibility so only those treated unfairly receive compensation. Agreements involving minimal commission or zero APRs will not receive redress. Where a lender can prove there were visible links with a manufacturer and dealer, a contractual tie alone will not trigger compensation. The threshold for high commission cases has been modestly raised. These and other changes mean 12.1m agreements are now eligible for compensation, down from 14.2m at consultation. 

We have adjusted how compensation is calculated to better reflect greater loss between 2007-2014. We have also ensured that consumers are not put back in a better position than they would have been had they been treated fairly, so in around 1 in 3 cases compensation will be capped. Firms are expected to pay out around £7.5 billion in redress, down from £8.2 billion at consultation.

We have also streamlined the scheme so consumers are compensated quickly and it is cost effective for firms to deliver.  Millions of consumers will be compensated this year, most of the rest by the end of 2027. Lenders will only need to contact complainants or those due compensation and recorded delivery will not be required, helping to cut the cost to firms of delivering the scheme by over 40%.  

The estimated total bill to firms is down from £11 billion to £9.1 billion. 

We want to provide certainty for consumers and finality for firms and investors, supporting the ongoing availability of competitively priced motor finance. Our approach is the best way to resolve this issue in the interests of consumers, firms, investors and the market.  We estimate the cost of dealing with complaints would be over £6bn more without a scheme.

We expect everyone to get behind the scheme, and lenders to put things right promptly for their customers. We need to draw a line under the past and support a healthy motor finance market for the future.  

Scope

Motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable by the lender to the broker will be considered for compensation.   

Firms owe liabilities from 2007. If complaints from that date were not covered they would need to be dealt with individually by firms, the Financial Ombudsman Service and through the courts, resulting in higher costs, lengthy delays and greater uncertainty.      

We have the powers to include agreements before 2014. However, this was questioned by some consultation respondents.  So, we will implement two schemes, one covering 6 April 2007 - 31 March 2014 and one from 1 April 2014 - 1 November 2024. If the earlier period is subject to legal challenge on these grounds, redress for consumers with agreements from April 2014 shouldn't be delayed. 

Eligibility

Consumers will only be considered for compensation if they weren't told details of at least one of 3 arrangements between the lender and the broker (usually the dealer):  

1. A discretionary commission arrangement (DCA), which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.  

2. A high commission arrangement (at least 39% of the total cost of credit and 10% of the loan).  

3. Contractual ties that gave a lender exclusivity or a right of first refusal, except where the lender can prove there were visible links with the manufacturer and dealer.  

There will be some exceptions, with cases considered fair, if:   

·    The commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date. Commission amounts below those levels are unlikely to have influenced the consumer's decision or broker's behaviour.     

·    The borrower wasn't charged interest.   

·    The DCA wasn't used to earn discretionary commission.

·    The lender can prove, in certain limited circumstances, it was fair not to disclose one of the arrangements above or that the consumer did not suffer any loss. This includes if a tie wasn't operated in practice or no better deal was available.  

Consumers who have successfully complained to the Financial Ombudsman, had their claim determined by a court or accepted redress will be excluded from the scheme.  

Claims for high value loans - higher than 99.5% of other loans that year - are also excluded, as they are not suitable for a mass-market redress scheme. These consumers can still complain to their lender and the Financial Ombudsman.   

Consumers generally have 6 years to bring a claim, but that may be extended where information about commission or a tie was deliberately concealed. We do not expect lenders to routinely find that cases are out of time to be considered for the scheme, given how poor disclosure was.

However, firms can exclude cases only involving high commission and ending before 26 March 2020 if they can show that the fact commission was payable was clearly and prominently disclosed. If firms rule consumers out of the scheme on this basis, they must inform them and explain why. The consumer will have the right to challenge this with the Financial Ombudsman.  

Consumers whose arrangement is deemed fair under the scheme can ask the Financial Ombudsman to review whether the scheme rules were followed. They could still make a claim in court.  

Calculating redress  

Approximately 90,000 consumers whose cases align closely with the Johnson case considered by the Supreme Court will receive redress of all commission plus interest. We define these as cases involving an undisclosed contractual tie and/or DCA and very high commission of at least 50% of the total cost of credit and 22.5% of the loan. 

For all other cases, consumers will receive the average of estimated loss and the commission paid, plus interest (the hybrid remedy). The estimated loss is based on economic analysis that shows there was a difference in the APR on DCA loans compared to those with flat fee arrangements.  

Following feedback, we have enhanced our analysis, incorporating more agreement data and covering a longer period of 2017-2021. We estimate average loss to be equivalent to an APR adjustment of 17% for this period and apply it to agreements from 1 April 2014.

Firms have advised that the availability of pre-2014 data is limited.  Collecting such data risks delaying compensation for consumers and certainty for firms with no guarantee it would materially improve any estimate of loss.    

Feedback and supporting evidence from respondents indicate that more harmful forms of DCA were more prevalent in earlier years. Differences between average DCA and non-DCA APRs were also larger during this period, indicating greater financial loss.

To reflect that, we have set an APR adjustment of 21% for pre 2014 cases. This sits at the mid-point between a 17% and 26% APR adjustment. The latter figure is, on average, equivalent to being repaid commission, which is the remedy reserved for those who suffered the most unfairness.  The difference between APR-17% and APR-21% results in an increase to average redress of £31 for pre 2014 cases.  

We are also using these APR adjustments for the relatively small number of cases that didn't involve a DCA, but involved high commission or a tie.

Consumers should not be compensated more than if they had been treated fairly or than those who suffered the most unfairness. So in around 1 in 3 cases receiving the hybrid remedy, compensation will be capped at the lowest of: 

·    90% of commission plus interest 

·    The total cost of credit, adjusted to account for a minimal cost offered to only 5% of the market at the time, excluding 0% APR deals

·    The actual total cost of credit, calculated on a simpler basis. This may be the lower figure if the adjusted cost of credit can't be accurately calculated, for example, if the lender doesn't have the payment schedule.

This means that about 64,000 agreements, where the APR was in the lowest 5% offered in the market at the time, excluding 0% deals, will not get compensation. 

Simple interest will be paid on 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. We have introduced a floor so the minimum interest rate consumers will receive for any year is 3%. Consumers will no longer be able to challenge the rate they get. 

How the scheme will operate  

There will be a short implementation period so firms can prepare. This will be up to:

·      30 June 2026 for loans taken out from 1 April 2014

·      31 August 2026 for those agreed earlier 

People who have already complained or complain before the end of the relevant implementation period will be compensated sooner. Lenders will have 3 months from the end of the implementation period to let complainants know whether they're owed compensation and how much.

Firms will only have to contact people who haven't complained if they are potentially owed money or those who are timed out of the scheme, avoiding unnecessary and costly communication with customers who are not owed redress. Firms have 6 months from the end of the relevant implementation period to do so. Consumers must respond within 6 months if they wish to join the scheme. Consumers who are not contacted can still complain to their firm by 31 August 2027. 

Lenders can use a range of communication channels that best meet consumers' needs, with appropriate safeguards to prevent fraud. 

Cost of redress  

Based on further analysis, we now estimate 75% of eligible consumers will take part, resulting in firms paying redress of £7.5 billion. Non redress costs are estimated to be £1.6 billion, taking the likely total bill to firms to £9.1 billion.

Our consultation set out indicative cost estimates. We have since refined our methodology to fully align with our consultation proposals and incorporated further lender data into our modelling. We have updated estimated redress liabilities and non redress costs under our proposals, compared to under our final rules, below.   

*At 75% uptake this would have been £7.3bn  

Ensuring compliance with the scheme  

We have established a dedicated supervisory team, led by a Director. We will supervise firms closely to make sure they follow the rules, including assessing whether any exclusions of agreements have been applied appropriately. Firms' senior managers will be required to attest to responsibility for their firm's overall oversight and delivery of the scheme.

We will intervene if firms fail to comply, including using enforcement powers if necessary. Firms will have to report regularly so we can closely monitor compliance, and we will publish updates on the scheme's progress.

We have set up a taskforce with the Solicitors Regulation Authority, Advertising Standards Authority and the Information Commissioner's Office to tackle the poor handling of motor finance claims by some claims management companies (CMCs) and law firms.    

Market impact   

The motor finance market has continued to attract investment and function well since we announced our intention to introduce a compensation scheme.   

Share prices of affected UK listed lenders increased by a range of 2.1% to 29.7% in the two weeks following the Supreme Court judgment and continued to rise steadily until the recent conflict in the Middle East. There have been 5 public securitisations of UK automotive loans since September 2025. New car sales in February reached a 22-year high and a record £41bn was lent on motor finance in 2025, 6% up on 2024.  

We have updated our analysis of the scheme's potential market impact. We conclude there will be limited impact on the new car finance market.

Changes we have made to how the scheme operates, such as removing the need to write to all customers, will benefit sub-prime and smaller lenders by ensuring the scheme is cost-effective to deliver. While there may be some short-term effects in the used and subprime segments, these are expected to be modest, with any affected lending volumes replaced over time.  

Overall, we anticipate continued availability of motor finance and strong competition between lenders.  Without a scheme, the impact on access to motor finance and prices for consumers could be significantly higher with uncertainty continuing for many more years.