The FCA has today set out a series of steps it needs to consider if it were to introduce a redress scheme as part of its review into motor finance commission arrangements.
Before January 2021, some motor finance lenders allowed brokers (usually car dealers) to adjust the interest rates on financing deals offered to customers. The higher the interest rate, the more commission the broker received. This was known as a discretionary commission arrangement (DCA), and the FCA banned this practice in the motor finance market in 2021.
There have since been a high number of complaints from customers about firms failing to disclose details about commission arrangements before the ban. Firms were rejecting most of these complaints, because they believed they haven’t acted unfairly and haven’t caused customers to lose out.
The Court of Appeal decided it was unlawful in the circumstances of three cases for the car dealers to receive a commission (whether discretionary or a fixed percentage) from lenders providing motor finance without giving the customer sufficient information about the commission and getting their informed consent to the payment.
Potential consumer redress scheme
In March 2025, the FCA said that if, following the outcome of the Supreme Court judgment, it concludes motor finance consumers have lost out, it's likely to consult on an industry-wide consumer redress scheme.
Under a redress scheme, the FCA would set rules for how firms assess claims and calculate redress. It wants to make any scheme easy for consumers to participate in, without needing to use a claims management company (CMC) or law firm.
The regulator weighed up a number of principles it could consider as part of the scheme, including simplicity and cost effectiveness, but noted "there may be tensions between some of these principles". For example, if it seeks to make a redress scheme comprehensive and ensure a wide range of affected consumers are included, it may mean consumers have to wait longer for redress because there are more claims to process.
The regulator is also considering whether to implement an opt-in or opt-out scheme. It says an opt-out scheme is "likely to be simpler for consumers and could reduce speculative claims". But for firms, it could be more expensive and take longer to implement, particularly if customers have changed address.
The FCA also noted that it has seen a "range of redress rates suggested", including "some highly speculative figures by some CMCs and law firms".
Some estimates have been calculated based on Financial Ombudsman decisions, but the FCA stressed that it may take a different approach to calculating redress in any intervention it makes.
It also cautioned that if firms go out of business or withdraw from the market as a result of the redress scheme, customers may not get any redress, as motor finance isn't covered by the Financial Services Compensation Scheme.
Next steps
The FCA will confirm within six weeks of the Supreme Court judgment whether it is proposing to introduce a redress scheme.
The consultation would set out detailed proposals for how a redress scheme would work in practice alongside draft rules, including the proposed timings for when a redress scheme would be implemented. It would include a cost benefit analysis scrutinised by a panel of external experts.
The final rules would set out when firms need to implement the scheme, which the FCA is predicting would be in 2026.
In a statement today, the FCA said: "It’s not possible to predict the outcome of the Supreme Court’s judgment, but we're engaging with stakeholders now and providing this update because we want to be able to act as quickly as possible once the Supreme Court has made its judgment, so we can start to bring greater certainty for affected consumers, firms and investors. For example, given the pre-consultation engagement, we may decide to have a shorter than normal consultation window (for example, six weeks)."
Darren Richards, head of Broadstone’s Insurance, Regulatory and Risk Advisory division, commented: “The update this morning from the FCA sets out some of the key decisions it is grappling with when it comes to implementing a redress scheme to deal with motor finance compensation. It is clear that the decisions behind the design of a redress scheme are complex and need to balance fairness for consumers and the integrity of the motor finance market.
“The FCA highlights some key issues around opt-in and opt-out approaches, which will change the volume of complaints dealt with. It also warns that the redress approach may differ from decisions made by the Financial Ombudsman service which some firms have taken as a benchmark for their planning.
“The message is that clear that preparation should continue – but executing redress will require consultation and there is a waiting game until the FCA concludes this process and provides details of the redress scheme.”
