FCA publishes redress scheme for the motor finance sector

The Financial Conduct Authority (FCA) has announced a £9.1 billion motor finance redress scheme, a significant reduction from earlier estimates of £11 billion. The number of qualifying agreements has decreased from 14.2 million to 12.1 million, leading to lower overall costs.

Millions of motor finance customers will receive compensation this year under a Financial Conduct Authority (FCA) scheme for those treated unfairly by firms that broke the law by failing to disclose important information.   Consumers were denied the chance to seek a better deal and, in some instances, paid more for their loan.

The FCA has made several changes to the free-to-use scheme in response to conflicting feedback  from consumers, their representatives, firms, manufacturers and industry bodies.     This ensures it is fair for consumers and proportionate for firms. The eligibility criteria have been tightened, average compensation increased for older agreements and a minimum 3% compensatory interest rate per annum added. Payouts will be capped in around 1 in 3 cases to ensure no one is put in a better position than had they been treated fairly.

12.1 million agreements made between 2007 and 2024 are now eligible for compensation, fewer than under the FCA’s original proposals. The average payout has increased to around £830 per agreement.  The FCA estimates that 75% of eligible consumers will make a claim. If so, total redress paid would be £7.5bn.

Nikhil Rathi, chief executive of the FCA, said “We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5 billion back into people’s pockets.

“Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure. Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.”

An industry-wide scheme is the most efficient way of compensating affected consumers while supporting the ongoing availability of competitively priced motor finance for millions who rely on it. Without such a scheme, the cost to lenders of dealing with complaints through the Ombudsman or courts is estimated to be over £6bn higher.

Motor finance loans taken out between 6th April 2007 to 1st November 2024 are covered.   There will be a short implementation period so firms can prepare. This will be up to 30th June 2026 for loans taken out from 1st April 2014  through to 31st August 2026.

Lenders will have three months from the end of the implementation period to inform complainants whether they’re owed compensation and how much. This means that people who have already complained or who complain before the end of the relevant implementation period will be compensated sooner.

Lenders will only contact people who haven’t complained if they are likely to be owed money. They have 6 months from the end of the relevant implementation period to do so. This avoids unnecessary and potentially confusing communication with people who won’t get compensation. Anyone not contacted has until 31 August 2027 to make a claim.

Claims for high-value loans - amounts higher than 99.5% of other loans that year - are not covered by the scheme, which is designed for the mass market. These consumers can still complain to firms and the Financial Ombudsman Service.

The FCA has also joined with the Solicitors Regulation Authority, Information Commissioner’s Office and Advertising Standards Authority to launch a taskforce to tackle poor handling of motor finance claims by some claims management companies (CMCs) and law firms.   The task force is the latest measure by regulators to improve standards. The FCA has already removed or amended 800 misleading adverts, over 28,000 consumers have been able to exit contracts free of charge, and three CMCs have reduced their high fees, protecting over 500,000 consumers.

Consumers can choose not to take part in the FCA’s compensation scheme and instead go to court, where they may get more or less compensation, based on the facts of their case. However, the outcome of a court claim is uncertain and accounting for legal fees they may pay, many consumers could end up with less. The FCA’s scheme is also likely to be faster and simpler.

Commenting on the publication of the Financial Conduct Authority’s redress scheme for the motor finance sector, (FCA) Shanika Amarasekara, Chief Executive of the Finance & Leasing Association, said “What we wanted to see was a responsible, workable announcement that genuinely draws a line under the commissions issue, restores regulatory certainty, and protects the future investability of the sector so that competitively priced motor finance remains available for customers in the years ahead.

“While the FCA has clearly endeavoured to make the redress scheme more proportionate than the proposed scheme consulted on in October, it will take time for us to assess the market impact of the measures announced today.

“We have always been clear that where consumers suffered loss, redress must be paid. But any redress scheme for a market of this size must accurately identify and compensate only those customers who genuinely suffered loss. If it is drawn too broadly so that it also compensates customers who suffered no loss, the only real winners will be Claimant Law Firms and Claims Management Companies – and that cannot be the regulator’s intention considering that it has today had to launch a multi-organisational taskforce in an attempt to address the conduct of claimant firms operating in the motor finance market.”

Sushil Kuner, Partner & Head of Financial Services Regulation at Freeths, said “The FCA’s final motor finance redress scheme shows that it has meaningfully engaged with consultation feedback and recalibrated its approach where the evidence justified it. By tightening eligibility, raising certain commission thresholds and refining how loss is assessed, the FCA has moved towards a more proportionate and legally grounded framework.

“Crucially, the final rules better reflect the Supreme Court’s fact‑specific approach in Johnson, addressing lender concerns that the consultation proposals risked going further than established legal principles on unfair relationships. That should help reduce legal friction and give firms greater confidence in delivering redress at scale.

“One of the most important clarifications in the FCA’s final scheme is its treatment of captive and white‑label motor finance. The rules now make clear that a visible or contractual link between a lender, manufacturer or dealer does not, by itself, give rise to redress.

That is a significant shift from the consultation framing, and one that will be welcomed across the captive finance and OEM‑linked sector. The FCA has moved the focus back to where the law places it, on whether the commission structure and disclosure actually resulted in unfairness and consumer loss, assessed on the facts. For integrated finance models, this provides much‑needed certainty that scale, structure or branding alone are not being treated as proxies for misconduct.

“This remains a complex and resource‑intensive operational programme, but the FCA’s adjustments should materially reduce the risk of satellite litigation and allow firms to focus on execution, identifying affected customers, evidencing decisions, and delivering redress efficiently.

“The final scheme also reflects a clear emphasis on deliverability and market stability. By narrowing scope, excluding low‑risk agreements and streamlining the process, the FCA has reduced the overall operational and financial burden on firms while still aiming to provide timely redress to consumers who were genuinely treated unfairly.

“That said, firms should not underestimate the challenge. Complaints handling, evidence around unfairness and loss, and alignment between scheme outcomes and wider dispute resolution will remain critical focus areas over the next 18 months.”

Richard Pinch, Senior Risk Director at  Broadstone, said “The FCA’s final motor finance redress scheme has tightened the eligibility requirements and capped redress in around a third of likely cases, bringing down the total bill and compensation payable for firms involved. This is likely to be a partial relief for the industry but implementing this streamlined motor finance redress scheme still presents a major operational and financial challenge for lenders.

“This is not just because of the scale of compensation but the complexity of identifying affected customers and calculating appropriate redress across historic agreements that in some cases go back many years. The scheme has now been essentially split into two phases for pre-2014 and post 2014 agreements introducing further complexity. Firms will need to rapidly review large volumes of legacy motor finance contracts, assess commission structures, reconstruct historic documentation and customer communications, and determine whether relationships could be deemed unfair under the legal tests. This will be a significant administrative exercise requiring substantial resource, systems capability and governance oversight.

“Despite the FCA attempting to draw a line under the issue and urging co-operation with these final rules, such is the scale of the programme that it is possible lenders and claims management companies (CMCs) could still tackle the scheme through the courts. As a result, and against the wishes of the regulator, this could therefore remain a live issue for the sector in the months and years ahead.”