Payouts on an expected 14 million unfair motor finance agreements could start next year, under an industry-wide compensation scheme proposed by the FCA.
The FCA estimates people would receive around £700 per agreement, on average, below the initial estimate of £950.
Based on the number of consumers the FCA estimates could take part in the scheme, lenders could pay out £8.2 billion in compensation with a further cost of £2.8 billion to firms for implementing scheme - taking total industry costs to around £11 billion.
Why is the FCA introducing a redress scheme?
Motor finance companies broke laws and regulations by failing to disclose important information. This led to unfairness, with consumers denied the chance to negotiate or find a better deal and, in some instances, paying more for their loan.
The FCA's review, covering data from 32m agreements, found widespread failures to adequately disclose the existence and nature of commission and contractual ties between lenders and brokers.
Of the agreements reviewed involving a discretionary commission arrangement (DCA) - where the broker could adjust the interest rate offered to a customer to obtain a higher commission - there was no evidence that the customer had been told about the DCA.
On 1st August 2025, the Supreme Court found a lender acted unfairly – and therefore unlawfully - because of the high, undisclosed commission paid to the broker and the failure to disclose a contractual tie.
How will the scheme work?
The scheme would cover motor finance agreements taken out between 6th April 2007 and 1st November 2024 where commission was payable by the lender to the broker. Those who are concerned they weren’t told key details about their motor finance arrangement – for example, about commission payments – should complain to their lender now if they haven’t done so already.
People can submit their own complaint using a template letter on the FCA’s website and the regulator has warned that those who choose to use a claims manager or law firm could lose a significant amount of any compensation owed.
Once the proposed scheme goes live, lenders will contact those who have already complained. If they don’t hear back after a month, lenders will assume they should review the case.
Those who have already complained before the scheme gets up and running are likely to receive compensation faster.
Those who haven’t complained will be contacted by their lender within six months of the scheme starting. People will be asked if they want to opt-in to the scheme to have their case reviewed. They’ll have six months to decide.
Those motor finance borrowers who don’t receive a letter – for example, because lenders no longer have their details and can’t trace them - will have a year from the scheme starting to make a claim. They will be able to do so by making a claim to their lender directly. If consumers don’t know who their lender was, there’s information on how to check on the FCA website.
People will only receive compensation under the scheme if they weren’t told details of at least one of three arrangements between the lender and the broker who sold the loan, often a car dealer, which are found in some motor finance agreements:
1. A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.
2. A high commission arrangement (35% of the total cost of credit and 10% of the loan).
3. A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.
Nikhil Rathi, chief executive of the FCA, said: “Many motor finance lenders did not comply with the law or the rules. Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.
“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated. On such a complex issue, not everyone will get everything they would like. But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”
Darren Richards, head of insurance, regulatory and risk at Broadstone, commented: “The FCA’s consultation on its method for calculating redress suggests the cost to the industry will broadly fall in the middle of its estimated range at the time of the Supreme Court ruling.
“The FCA provided clarity on what it determined to be an ‘unfair’ agreement irrespective of whether there was a discretionary or non-discretionary arrangement. This was determined to be inadequately communicated high commission arrangements, at least 35% of the total cost of credit and 10% of the loan, or tied arrangements that gave a certain lender exclusivity or a first right of refusal.
“Its redress methodology aims to combine the overpaid commission plus interest and the Regulator’s own estimation of loss – taking into account that the loan with commission may have been at a different interest rate than the market norm. By averaging these two numbers the FCA is attempting to produce a fairer outcome for consumers. Likewise, the interest calculation will add the Bank of England’s base rate per year plus 1% from the date of overpayment until compensation is paid which the FCA estimates to be 2.09% on average.
“Implementing this compensation scheme will be a significant exercise for finance companies who will need to review all of their DCA cases, assess whether they are unfair and then calculate potential redress. Once the consultation is completed lenders will have clarity over the FCA’s scheme to begin the process of contacting the over 4m customers who have made complaints, plus the remainder to be included in the scheme, to calculate and pay due redress to customers as soon as possible.”
Kate Albert, CEO of Kova Professions, added: "From a professional indemnity (PI) insurer’s perspective, the FCA’s proposed Motor Finance Compensation Scheme represents a significant regulatory and market event. The recognition of widespread failings in the disclosure of discretionary commission arrangements highlights how remuneration structures can create long-tail liability exposures long after the practices themselves have ceased.
"While the immediate impact is focused on motor finance lenders and brokers, the wider insurance market should view this as a clear signal of the FCA’s evolving stance on transparency and fairness in distribution. The principles at play, particularly the presumption of consumer detriment where disclosure was incomplete, may have future relevance for discretionary or profit-based commission models within insurance intermediation.
"While any direct extension of these principles beyond motor finance remains speculative, the FCA’s approach underscores a regulatory environment increasingly intolerant of opaque incentives.
"For example, if similar scrutiny were applied to insurance distribution, it is possible that intermediaries and insurers could face heightened pressure to demonstrate that all remuneration structures are fully disclosed, consumer outcomes are not distorted, and record-keeping supports compliance over time. This could lead to increased operational costs, premium pressure within the PI market, and a broader shift towards flat-fee or transparent remuneration models.”
