FCA unveils landmark Motor Finance Redress Scheme
On 7 October 2025, the Financial Conduct Authority (FCA) published a consultation paper proposing an industry-wide redress scheme for motor finance customers who may have been treated unfairly between 6 April 2007 and 1 November 2024 (the Scheme).
How we got here
On 28 January 2021, the FCA banned Discretionary Commission Arrangements (DCAs) in the motor finance sector. These allowed brokers - typically car dealers - to set customer interest rates, with their commission directly linked to the rate, incentivising higher-cost finance.
Simultaneously, the FCA introduced enhanced guidance on commission disclosures, requiring brokers to clearly disclose any financial arrangements with lenders that could affect their impartiality or influence consumer decisions.
In January 2024, amid a surge in consumer complaints and litigation concerning historic DCAs, the FCA launched a formal review of motor finance agreements entered into between 6 April 2007 and 28 January 2021. Many firms had rejected complaints, arguing their conduct complied with rules at the time. However, the Financial Ombudsman Service (FOS) and several County Court rulings found in favour of consumers, citing inadequate disclosure and unfair relationships.
Two key legal decisions followed:
- Court of Appeal (October 2024): this judgment found in favour of three consumers against their lenders, finding amongst other things that broker dealers owed a fiduciary duty to consumers and the commissions paid by the lenders to the broker dealers were secret, engaging the tort of bribery. The Court of Appeal also found in Mr Johnson’s case against FirstRand Bank (trading as MotoNovo Finance) there was an unfair relationship between Mr Johnson and the lender within the meaning of the Consumer Credit Act 1974 (CCA), particularly because the commission payment by the lender to the broker dealer was very high.
- Supreme Court (August 2025): this judgment partially reversed the Court of Appeal’s judgment, finding that broker dealers did not generally owe a fiduciary duty to consumers. However, the Supreme Court upheld the Court of Appeal’s judgment in Mr Johnson’s claim under the CCA, finding that the relationship between Mr Johnson and FirstRand was indeed unfair because of the high commission payment (amongst other reasons).
These judgments provided sufficient legal clarity for the FCA to proceed with the Scheme. The regulator concluded that inadequate disclosure prevented consumers from making informed choices, potentially leading to overpayment on motor finance.
The FCA’s review of around 32 million agreements revealed widespread failures to disclose commission arrangements and broker-lender ties. The proposed Scheme aims to address this by
- delivering fair, timely, and consistent outcomes;
- avoiding the overcompensation issues seen in the PPI redress programme; and
- making the Scheme free to access for consumers and, in the FCA’s view, more cost-effective for firms than litigation or FOS processes.
Key Proposals
Scope
The Scheme covers regulated motor finance agreements taken out between 6 April 2007 and 1 November 2024 involving commission payments from lenders to brokers, where there has been inadequate disclosure of one or more of the following (Scheme Cases):
- A DCA;
- High commission levels (equal to or greater than 35% of the total credit cost and 10% of the loan); and/or
- Undisclosed contractual ties between lenders and brokers, which gave a lender exclusivity or a first right of refusal.
The Scheme applies to both lenders and brokers, though lenders are expected to deliver the Scheme. Brokers must cooperate with the Scheme and where they played a part in the failings, the FCA notes that lenders may seek contributions from them.
For the purposes of the Scheme, commission means “any commission, fee or other form of remuneration payable (directly or indirectly) by a lender, or by a third party, to a credit broker in connection with entering into of a specific motor finance agreement”.
Consumers already compensated or with live FOS complaints will be excluded from the Scheme.
Scheme design
Stage 1 – Identification of Scheme Cases and Consumer Consent
Lenders must identify Scheme Cases and contact affected consumers as follows:
- A consumer who previously complained and whose case qualifies as a Scheme Case will have their case automatically assessed unless they opt out. Opting out means they cannot refer the complaint to the FOS and must go to Court. Firms will be required to write to consumers who have already complained within three months of the Scheme start date.
- Consumers who have not complained will be invited to opt-in to the Scheme, provided the lender has the records needed to identify the consumer and their contact details. Firms must contact these customers within six months of the Scheme’s start date. Consumers then have six months to opt-in from the date of the invitation. If not contacted, they will have one year from the Scheme’s start date to proactively opt in.
- Consumers with qualifying complaints after the Scheme starts will be treated.
- After the one-year opt-in period, complaints to lenders, brokers or the FOS will only be allowed in exceptional circumstances. This is designed to ensure a degree of certainty for firms in terms of the scope of potential liability, enabling them to assess and manage financial exposure, allocate resources appropriately and plan for operational implementation within a defined timeframe.
To address record gaps, firms are expected to use alternative data sources (e.g. credit reference agencies) and the FCA will work with industry on practical solutions.
Stage 2 – Liability Assessment
Only consumers who entered into unfair arrangements will qualify for compensation. A relationship will be deemed unfair if there was inadequate disclosure of one or more of the three qualifying factors that must be present in Scheme Cases, set out above. If none are present, the lender will be expected to find that the relationship was fair.
Scheme Cases will be presumed unfair unless firms can rebut this by showing:
- adequate disclosure of the relevant arrangement
- in DCA-only cases, the broker selected the lowest interest rate that didn’t generate additional commission
- the consumer was sufficiently sophisticated to understand the arrangement
Stage 3 – Redress Calculation
Following the Johnson ruling, which awarded repayment of commission plus interest due to an unfair relationship under the CCA, the FCA proposes a balanced approach combining legal precedent and economic analysis.
- Consumers in cases closely aligned with Johnson - involving a contractual tie and commission equal to, or greater than, 50% of total credit cost and 22.5% of the loan - would receive full repayment of commission plus interest. These cases are expected to be rare
- For all other cases, compensation would be calculated as the average of estimated loss (based on interest rate differentials) and the commission paid. This method may also apply to a small number of non-DCA cases within the Scheme
Simple interest will be added, calculated as the Bank of England base rate plus 1% annually from the date of overpayment to the date of compensation. The FCA estimates the weighted average interest rate payable will be 2.09% annually.
The FCA estimates average compensation of £700 per agreement, with total redress potentially reaching £9.7bn if all eligible consumers opt in. These estimates are based on cautious assumptions due to data gaps and uncertainties which are detailed in the Consultation.
Firms will have a period of three months to complete stages 2 and 3 from the date a consumer joins the Scheme. Notably, the FCA has confirmed it will not introduce a de minimis threshold. Instead, lenders may settle low-value cases more flexibly, ensuring all qualifying consumers remain eligible for compensation under the Scheme.
Stage 4 - Communicating Redress Outcomes
Firms must issue a formal ‘redress determination’ to consumers in all Scheme Cases, including where no redress is due. The FCA has prescribed the content of these communications and proposed the following process:
- Step 1
If a firm concludes during Stages 1 to 3 that redress is or isn’t due, it must send a provisional redress determination to the consumer. This must be issued within seven months for agreements subject to pre-existing complaints and within 15 months for all other agreements.
If the consumer objects to the redress determination, they will have one month to submit supporting evidence. The firm must then consider this within two months of receipt. - Step 2
If the consumer accepts the provisional redress determination or does not object within one month, the firm must issue a final redress determination. - Step 3
Where redress is payable, firms must make payment within one month of issuing the final redress determination.
Next steps
- The Consultation closes on 18 November 2025
- By 4 December 2025, the FCA will confirm whether it will extend the deadline for motor finance firms to provide a final response to relevant customer complaints
- Final rules expected in early 2026
- Compensation payments expected to begin later in 2026
What should firms be doing now?
Alongside its Consultation, the FCA issued a Dear CEO letter to all firms involved in motor finance lending and broking since 2007. The letter makes clear that firms must not wait for the consultation to conclude before taking action. The FCA expects lenders and brokers to begin preparing now to manage existing complaints and ensure readiness for the Scheme’s implementation.
There are five key areas where firms should act immediately:
- Engage with the Consultation
Firms are expected to review the proposals and submit feedback on key issues, including Scheme design, redress methodology and operational delivery. - Data Readiness
Firms should locate and assess historical records, including agreements, commission structures and disclosure documentation. Identifying data gaps and planning how to address them – potentially using third-party sources like credit reference agencies – is essential. - Consumer Identification
Firms must develop strategies to identify and contact affected customers. This includes verifying the accuracy of existing contact details and planning how to trace consumers who may have moved or changed contact information. - Information Gathering
Collaboration between lenders, brokers and third parties will be crucial to gather sufficient information to assess whether cases fall within scope of the Scheme and to determine liability. - Governance and Resourcing
Firms should establish appropriate governance frameworks and allocate sufficient resources to manage Scheme delivery, including complaint handling, data analysis and consumer communications.
Firms will need to adhere to the Scheme rules and guidance, once they come into force. The FCA has made clear that it will supervise firms closely and assertively, collecting data regularly from firms and that it won’t hesitate to use its full range of powers against firms who don’t follow the rules.
How Freeths can help
Freeths is advising clients across the motor finance sector on navigating the FCA’s proposed redress scheme and broader regulatory expectations. Our multidisciplinary team is well-positioned to help firms respond proactively and strategically. We offer support with:
- Regulatory strategy and consultation responses – Helping you engage effectively with the FCA’s proposals and shape the future framework
- Data analysis – Helping firms assess exposure and identifying data gaps
- Governance and operational readiness – Advising on governance structures and resource allocation to ensure Scheme compliance
- Litigation risk assessment and mitigation – Evaluating legal exposure and developing strategies to reduce claims risk
- Communications planning and customer engagement – Supporting clear, compliant messaging to affected consumers
For tailored advice or to discuss how Freeths can assist your firm, please contact Richard Coates, Partner and Head of Automotive, or Sushil Kuner, Partner and Head of Financial Services Regulation.
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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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