The FCA's proposed consumer redress scheme in relation to motor finance - the highlights….

Yesterday, the Financial Conduct Authority (the “FCA”) announced its proposed and long-awaited redress scheme in relation to motor finance. Following on from the Supreme Court's judgment in the summer, the FCA describe their proposals in a series of documents here. We set out the key proposals below.

What is it?

A Section 404 scheme under the Financial Services and Markets Act 2000 ("FSMA") for the payment of compensation to consumers (“the Scheme”). Such a scheme can only be used to compensate losses for which consumers have a remedy in law (whether under statute, common law or the FCA’s own rules), and involves a mandatory consultation followed by FCA making rules which are binding on those regulated firms affected by the Scheme.

Scope 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. While lenders may still be able to argue limitation defences, the FCA argue that deliberate concealment of the payment of commission by the defendant or its agent will extend the ordinary six-year limitation period (relying on Section 32(1)(b) of the Limitation Act 1980).

The FCA say the majority of motor finance agreements will not qualify for compensation.

However, the FCA estimate 14.2 million agreements – 44% of all agreements made since 2007 – will be considered unfair because they involve inadequate disclosure in relation to one or more of following criteria that they will apply:-

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 between a lender and broker that gave the lender exclusivity or a right of first refusal.

It is proposed that lenders may be able to rebut the presumption of unfairness in relation to the above cases in some limited circumstances. For example, under the Scheme lenders would be entitled to determine there was no unfair relationship if:

there is evidence of adequate disclosure of the relevant arrangement;
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) – a sophistication test.

Opt out and opt in

The FCA propose lenders should contact consumers who complained before the Scheme starts within three 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 six months (where lenders can identify them) and asked if they would like to opt-in.

Significantly, those consumers who have already been compensated for complaints covered by the Scheme would be excluded, and the Financial Ombudsman (the “FOS”) 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 FOS will be contacted by lenders and invited to opt into the Scheme.

Consumers who opt-out or decline to opt in (as applicable) will still be able to pursue claims through legal proceedings.

Redress calculation

The FCA proposes that compensation is calculated in two possible ways:-

The FCA considers that the Johnson case considered by the Supreme Court was a very serious case, and they do not think that courts would necessarily award the same high level of compensation in all motor finance cases. However, for those consumers whose cases align closely with the Johnson case, they would under the Scheme receive a refund of the commission paid, plus interest. The FCA propose to define such cases as 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. They say these cases will be relatively rare.
For all other cases, it is proposed that compensation will be paid on the basis of a “hybrid remedy”. This would involve taking the average of (i) what the FCA estimate consumers have overpaid (or lost, with loss estimated as the difference in the interest rate charged on loans with discretionary commission arrangements compared with those with flat fee arrangements), plus interest and (ii) the amount that would be calculated in a case falling in 1. above.

Interest

It is proposed that simple interest should be paid on the compensation, based on the annual average Bank of England base rate per year plus 1%.

Total cost of redress

The FCA estimate the total cost of the Scheme will be £11 billion (£8.2 billion in compensation and £2.8 billion in costs) and consumers being compensated an average of around £700 per agreement.

Complaints deadline

The FCA are also consulting on extending the deadline for firms to send a final response to certain motor finance complaints to 31 July 2026.

Lenders, not brokers

The FCA propose that lenders deliver the Scheme, rather than brokers because this will be “simpler and ensure more timely and comprehensive redress, given there are many more brokers than lenders”. Brokers will have to cooperate, providing information lenders need to operate the Scheme promptly.

The consultation on the proposed redress scheme closes on 18 November 2025.

The FCA expect to publish their final rules by early 2026 depending upon feedback they receive and firms and other parties working constructively together and with them. The Scheme would launch at the same time, with consumers starting to receive compensation later in 2026.

Please let us know if it would be helpful to discuss any aspects further.

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