The UK’s Financial Conduct Authority (FCA) has published a detailed statement outlining the key considerations it is weighing as it prepares for a possible industry-wide redress scheme in response to a major motor finance mis-selling scandal.
This initiative could lead to billions in compensation and has the potential to become the country’s most significant consumer finance redress programme since the Payment Protection Insurance (PPI) debacle.
Each year, over two million consumers purchase vehicles using motor finance arrangements. Until a regulatory ban in January 2021, some lenders allowed brokers—typically car dealers—to adjust interest rates on customer finance agreements in exchange for higher commissions. This practice, known as Discretionary Commission Arrangements (DCAs), has since become the focus of substantial consumer complaints.
Court Rulings and Regulatory Scrutiny
The FCA’s renewed focus follows a Court of Appeal decision holding that it was unlawful for car dealers to receive undisclosed commissions—whether discretionary or fixed—without providing customers with sufficient information and obtaining informed consent. A final ruling from the UK Supreme Court is expected as early as July 2025. The outcome will likely determine whether the FCA proceeds with a formal redress scheme.
The FCA’s early engagement with stakeholders is intended to enable swift regulatory action following the Court’s decision. It has stated that, should the Supreme Court uphold the ruling, the regulator is likely to propose a consumer redress framework, subject to consultation.
Design Principles of a Redress Scheme
In its June 5 statement, the FCA emphasized that any redress mechanism must be:
- Fair to consumers who suffered financial detriment;
- Effective in maintaining the integrity and competitiveness of the motor finance market; and
- Accessible, avoiding the need for consumers to rely on claims management companies (CMCs) or legal firms, which often charge fees of up to 30% of compensation received.
The FCA warned consumers that premature engagement with CMCs could result in unnecessary costs, especially if a streamlined, no-cost redress process is implemented later.
The Authority also flagged the potential tensions between creating a comprehensive scheme and delivering timely redress. For example, an opt-in structure may ensure greater individual clarity and control but could delay payments. An opt-out scheme, on the other hand, would include more consumers automatically but may also overwhelm the system with volume.
Financial and Market Impact
Several financial institutions, including Lloyds Banking Group, Close Brothers, and Santander UK, have already provisioned over £1.5 billion to cover potential liabilities. Some analysts have compared the potential financial impact to the PPI scandal, which ultimately cost the UK banking sector nearly £40 billion.
In response to growing speculation around compensation levels, the FCA cautioned against inflated redress expectations. “We’ve seen a range of redress rates suggested. This includes some highly speculative figures by some CMCs and law firms,” the regulator stated, underscoring its intention to use a balanced and evidence-based approach in assessing consumer harm.
Next Steps
The FCA will confirm within six weeks of the Supreme Court’s decision whether it intends to consult on a redress scheme. A formal consultation would outline proposed rules, timing, and a cost-benefit analysis reviewed by the FCA’s external expert panel. Subject to the consultation’s outcome, final rules could be confirmed in 2026.
In parallel, the regulator is reviewing its rulebook for motor finance firms and may propose updates based on the Court’s findings and industry feedback.
