FCA tightens eligibility requirements in final motor finance compensation scheme

The FCA has published a policy statement setting out of the terms of its motor finance redress scheme.

The consultation received over 1,000 responses, with conflicting feedback as to the FCA’s proposals. The core tests for compensation remain the same, namely that the consumer was not informed of at least one of a (1) a DCA, (2) a high commission arrangement, and / or (3) contractual ties offering exclusivity, between the lender and broker. However, the FCA has tightened eligibility requirements so that only those that were treated unfairly will be able to receive compensation.

The consultation had proposed that the scheme would cover any regulated motor finance agreement taken out between 6 April 2007 and 1 November 2024 where commission as payable by the lender to the broker. Now:

• the FCA will take a two-scheme approach: Scheme 1 will cover agreements from 6 April 2007 to 31 March 2014; and Scheme 2 will cover agreements from 1 April 2014 to 1 November 2024;
• agreements involving minimal commission (£120 or less for Scheme 1 agreements, and £150 or less for Scheme 2 agreements) will be considered fair;
• “high commission” will be at least 39% of the total cost of credit and 10% of the loan (rather than 35%/10%);
• where lenders can prove visible links between themselves, manufacturer and dealer, this will be considered fair;
• there are explicit differences in redress methodology for each scheme period, with a higher APR adjustment of 21% for Scheme 1 cases (to recognise greater potential consumer harm) and a lower adjustment of 17% for Scheme 2 cases;
• redress will be capped at the lowest of 90% of of commission plus interest, an adjusted measure of the total cost of credit, or the actual cost of credit if full details are unavailable – to ensure that consumers are not compensated more than had they been treated fairly;
  • However, cases with very high commission (at least 50% of the total cost of credit and 22.5% of the loan) and either a DCA, tied arrangement or both, will be repaid commission plus interest with no caps applied, in line with the Supreme Court award in the Johnson case;
• firms no longer need to contact all customers, only complainants and those with potentially relevant arrangements,
• the scheme excludes most ‘high value loans’, being those higher than 99.5% of other loan values each year, as these are not suitable for a scheme designed for mass-marketed products and will be better addressed through individual routes;
• high commission-only cases concluding before 26 March 2020, where commission was clearly and prominently disclosed (even if the amount was not), may be excluded as time-barred, except where there was an undisclosed DCA or tied arrangement; and
• firms may rebut the presumption of unfairness if they can demonstrate a tied arrangement was not operated in practice.

Firms have an implementation period of up to 3 months before the scheme starts for Scheme 2 agreements (30 June 2026), and up to 5 months for Scheme 1 agreements (31 August 2026), although they may choose to begin processing claims before then.

The changes mean the FCA now considers that 12.1m agreements will be eligible for compensation (down from 14.2m at consultation), firms are expected to pay out around £7.5bn in redress (down from £8.2bn at consultation) and the estimated total bill to firms will be £9.1bn (down from £11bn at consultation).

The FCA is also now part of a joint taskforce with other regulators which aims to tackle poor practice in motor finance claims handling.