FCA proposed redress scheme on motor finance commission

On 7 October, the FCA  published its highly anticipated consultation paper on the implementation of a consumer redress scheme relating to commission arrangements in car finance transactions.

This has been expected since August 2025 when the FCA announced that it would consult on an industry-wide scheme to compensate motor finance customers who were treated unfairly.  This in turn had been prompted by the Supreme Court’s judgment in the cases of Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd [01.08.25], which considered the extent to which commission paid by lenders to car dealers breached a duty owed by car dealers to their customers.

The FCA has now confirmed the details of what form the redress will take and who will be eligible. The industry has until 18 November to provide their comments on the FCA’s proposals.

The FCA’s proposal is to compensate consumers (including sole traders, small partnerships and unincorporated bodies) where the relationship between the consumer and lender was unfair.  It will be held to be unfair, and consumers will be eligible to qualify for redress, where:

1. they took out a regulated motor finance agreements taken out between 6 April 2007 and 1 November 2024 and
2. commission was payable by the lender to the broker
3. the finance agreement was unfair because there was inadequate disclosure of:
1. a discretionary commission arrangement or
2. commission that was equal to or greater than 35% of the total cost of credit and 10% of the loan or
3. contractual ties that gave a lender exclusivity or a right of first refusal.

These are broad criteria, although the logic of at least the first two (a. and b.) is understandable. 

Lenders will have an opportunity to try and rebut the suggestion of unfairness but the FCA considers that such transactions will be rare.

If a transaction meets the scheme criteria, the consumer will be entitled to compensation and the lender must calculate the redress owed,  as follows:

• In the most extreme (and therefore, rare) cases, akin to the transaction entered into by Johnson that was the subject of the Supreme Court judgment, the consumer will receive the commission plus interest.  This is notwithstanding that the consumer is unlikely to have been able to obtain finance without some level of commission being paid to the broker.
• In the majority of cases, the compensation will be based on an average of the amount overpaid and the commission paid plus interest at the base rate plus 1%.

The FCA has estimated that this redress scheme is likely to lead to compensation of £8.2bn and that the lending industry will incur a further £2.8bn implementing the scheme.

This is based on the assumption that 85% of eligible consumers opt into the scheme and are each compensated c.£700.

Any consumers who do not meet the above criteria will not get compensation through the redress scheme.  They will have to ask the Financial Ombudsman Service (FOS) to consider if the lender in question followed the scheme rules or not.  However, the FOS cannot reach a determination that there was an unfair relationship.

Consumers who do not qualify could also bring a claim in court.  However, it is difficult to see why anyone would consider such a claim to be sufficiently likely to succeed as to merit the time and effort of pursuing a remedy through the courts.  This is particularly the case  where their claim does not even meet the fairly broad scope of the redress scheme.

The estimated cost of the redress is lower than the FCA’s previous estimates.  This is not a surprise as those figures of £9-18bn were heavily caveated, inconsistent with the FCA’s estimates of individual compensation and higher than industry specialists had calculated.

Firms will now have to review their records from 2007, assuming that they still have them, and have not been obliged to delete them to comply with data protection regulations.  They will also need to identify arrangements that meet the above criteria.  

We suggest that the practicalities of obtaining records of tied arrangements may be more of a hurdle than the FCA supposes.  Lenders will be reliant on the brokers – i.e. the car dealerships – having retained records since 2007.

This places a significant burden on lenders because if they cannot demonstrate, through documentation, that the disclosure of information was adequate, it will be presumed to have been inadequate.

Comment

Notwithstanding our view that the scheme criteria are broad, and the significant costs to be suffered by lenders in implementing the scheme, a redress scheme must be viewed as the best resolution to this issue. 

The alternatives, such as reliance on the FOS, would have been more time consuming, less predictable, involve greater cost and the awards are likely to have been detached from legal principles and the guidance found in the Supreme Court judgment in Johnson. 

Predicted costs of £11bn are problematic in the current economic climate, but the outcome could have been worse.

Related items: Motor finance claims – Supreme Court decision brings relief to lenders and credit brokers but the FCA is consulting on a redress scheme