FLA urges scrutiny as FCA outlines £8.2bn motor finance redress plan

The Finance & Leasing Association (FLA) has urged caution following the Financial Conduct Authority’s (FCA) publication of its long-awaited consultation on a sector-wide redress scheme for motor finance customers, warning that the costs “remain too high” and that the detail will require “much scrutiny” before firms can assess the full operational and financial impact.

The 360-page consultation sets out how the regulator proposes to deliver compensation for consumers who were charged unfairly under commission-linked car finance agreements between 2007 and 2024. The FCA estimates that around 14.2 million agreements, representing 44% of all credit deals over that period, may have involved failings in commission disclosure, resulting in an estimated £8.2 billion in redress.

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If implemented, the scheme would mark the most extensive coordinated compensation exercise since the payment protection insurance (PPI) redress programme.

“We remain concerned that the costs are too high, but this is a 360-page document which will require much scrutiny over the coming weeks as we assess the best way to get redress to those consumers who lost out, while keeping the motor finance market stable and competitive,” said Shanika Amarasekara, CEO of the FLA.

Market stability

The FCA said a centralised compensation scheme is the most efficient and equitable route to redress, providing a consistent framework for consumers and certainty for firms. Without such a scheme, the regulator warned, the alternative would be a drawn-out process of individual complaints to firms, the Financial Ombudsman Service (FOS) and the courts, generating higher costs and inconsistent outcomes.

Lenders, not brokers, will be responsible for administering the redress programme. Firms would need to identify affected customers, calculate compensation and process payments, with regulatory oversight to ensure “timely and fair” outcomes.

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The FCA expects the total cost to the industry, including implementation, to reach around £11 billion, based on an assumed 85% consumer participation rate. The consultation proposes that compensation average £700 per agreement, with interest calculated at the Bank of England base rate plus 1%.

Legal clarity

The consultation follows two landmark court rulings that provided legal certainty around lenders’ disclosure duties. The High Court’s decision in December 2024 and the Supreme Court judgment in August 2025 confirmed that undisclosed high or discretionary commissions created unfair relationships under the Consumer Credit Act.

The FCA’s own investigation, covering 32 million motor finance agreements, found “widespread failures” to disclose the existence or nature of commission arrangements between lenders and brokers. These failings, the regulator said, left consumers unable to make informed borrowing decisions and often resulted in higher effective interest rates.

“There is now sufficient legal clarity to move ahead with a compensation scheme,” the FCA said.

Scheme design

The proposed scheme will cover regulated motor finance agreements entered into between 6 April 2007 and 1 November 2024, where a commission was payable by the lender to a broker.

The FCA identifies three types of arrangement that are likely to create an unfair relationship:

Discretionary commission arrangements (DCAs) allowing brokers to increase rates to earn higher commissions;
High commissions, defined as at least 35% of the total cost of credit and 10% of the loan amount; and
Contractual exclusivity ties between lenders and brokers.

Lenders will be permitted to rebut the presumption of unfairness in limited circumstances, for example, where there is clear evidence of adequate disclosure, where a broker chose the lowest possible rate, or where the consumer is demonstrably financially sophisticated.

Consumers who have already complained will be automatically included unless they opt out. Those who have not complained will be invited to opt in within six months of the scheme’s launch.

Compensation methodology

The FCA proposes a two-tier redress structure. In severe cases, those resembling the Johnson Supreme Court case, involving undisclosed contractual ties and commissions above 50% of the cost of credit, consumers would receive the full commission plus interest.

For all other eligible cases, compensation would be based on the average of the estimated consumer loss and the commission paid, plus simple interest. The regulator argues this blended approach “balances the courts’ findings with evidence of actual economic loss”.

The FCA has published detailed modelling assumptions, including sensitivity analyses and a cost-benefit assessment reviewed by its independent panel.

Operational burden

Law firms and compliance specialists have warned that the operational complexity of the scheme should not be underestimated. Firms will need to reconstruct historic data, map exposures, and work with brokers to confirm commission structures across legacy systems that may date back more than a decade.

Sushil Kuner, Partner and Head of Financial Services Regulation at Freeths, said the proposed scheme “represents a significant regulatory intervention” and signals “a forensic approach to enforcement”.

“The FCA’s uncompromising stance on data availability, and its suggestion that firms may need to work with third parties to reconstruct records, shows it expects complete transparency,” she said.

Helen Simm, Partner at Browne Jacobson, warned that even with reduced average compensation levels, firms should brace for a surge in claims.

“Despite this being in consultation, businesses need to develop a strategy now to map their exposure,” Simm said. “Without this, firms risk regulatory enforcement, reputational damage and the uncertainty of protracted litigation.”

Next steps

The FCA insists the motor finance market remains “orderly and competitive” and that product availability should not be significantly affected. However, it has acknowledged concerns about non-prime lenders, which may face disproportionate strain due to thinner capital bases and limited access to wholesale funding.

The consultation also proposes extending the complaint response deadline for motor finance firms to 31 July 2026, allowing for “consistent and orderly outcomes” during the rollout of the redress process.

Responses to the consultation are due by 18 November 2025, with the FCA aiming to publish its final rules and policy statement in early 2026. Compensation payments could begin later in 2026, depending on feedback and the pace of operational readiness across the sector.

FCA chief executive Nikhil Rathi said the regulator had sought to balance consumer redress with market stability: “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.”