FCA consults on motor finance redress scheme

The FCA has decided that a compensation scheme for customers treated unfairly when taking out motor finance is the right way to go, and is consulting on the terms of the scheme.

Its research shows that:

• based on data from 32m agreements, there were widespread failures adequately to disclose the existence and nature of commission arrangements between lenders and brokers;
• where there was a DCA, there was no evidence the customer had been told about its existence;
• the majority of agreements will not qualify for compensation, but around 41.2m (44% of agreements) will be unfair because of inadequate disclosure of:
  • a DCA
  • “high commission” (which the FCA has decided it equal to or greater than 35% of the total cost of credit and 10% of the loan) and/or
  • contractual arrangements that give a lender exclusivity or a right of first refusal;
• around 85% of eligible consumers are likely to take part in the scheme, and will get a total of around £8.2bn.

Key elements of the scheme are:

• it will cover any regulated motor finance agreement taken out between 1 April 2007 and 1 November 2024 where commission was payable by the lender to the broker;
• the test of unfairness is based on the three conditions above, but lenders will be able to rebut the presumption in limited circumstances (such as that there was adequate disclosure, or a broker using a DCA selected the lowest interest rate at which they would not have made additional commission, or that even if disclosure was not adequate, the lender can show the customer was sufficiently sophisticated to have been aware of the relevant features anyway);
• no customer will be entitled to compensation under the scheme if their loan did not meet one of the three conditions – and if they then chose to complain to the FOS, it would only arrive at a different outcome if it decided the scheme rules weren’t followed;
• lenders should contact consumers who complained before the scheme starts (already over 4 million) within 3 months, and all these consumers will be included in the scheme unless they opt out – and they would not then be able to opt back in;
• lenders should contact all other consumers they can identify within 6 months, to ask them if they would like to opt-in;
• any consumer who has not been contacted can ask their firm for a review within 1 year of the scheme starting;
• consumers who have already received compensation for relevant complaints will be excluded;
• the FOS will resolve complaints already received and not through the scheme;
• lenders will need to contact customers whose complaints they rejected but who did not go the FOS;
• firms will need to deal with paused complaints “promptly” (and the FCA proposes to extend the deadline for final responses to 31 July 2026);
• redress calculation will balance the Supreme Court approach with evidence of consumer loss – the FCA stresses that the Johnson case was very serious and the courts would not necessarily have awarded the same levels of compensation in other cases. So the FCA has decided that cases with undisclosed contractual ties and commission equal to or greater than 50% of the total cost of credit and 22.5% of the loan will receive the commission plus interest.  But the compensation levels in all other cases will be the average of what the FCA thinks the consumer has overpaid or lost, and the commission paid plus interest;
• simple interest will be due on compensation on the annual average base rate plus 1% from the date of overpayment to the date compensation is paid.

The FCA has stressed that the 35%/10% thresholds are for use only in the context of the scheme and should not be read across to any other financial service.

The FCA believes the motor finance market is still functioning well, with good product availability and competition.

The FCA seeks comments on the redress scheme on 18 November, but on the extension to the complaints handling rules by 4 November. It then expects to publish its final statement and rules (assuming it introduces the scheme) in early 2026 and launch the scheme at that time.

In anticipation, it has written to motor finance lender and broker CEOs, telling them what it expects them to be doing now – specifically identifying affected customers, deciding which cases are in scope, prepare for responding to complaints (especially leasing complaints, which are outside the scheme), be in a position to calculate redress accurately and pay it promptly, and not unduly to delay delivery of any part of the scheme. It expects openness and honesty and says it will not hesitate to act if it feels a firm is not sufficiently preparing or cooperating. It proposes that lenders will deliver the scheme, but they may seek contributions from brokers that played a part in the failings.