Taking on board a large volume of industry and consumer feedback, the FCA’s final policy statement has made a number of adjustments, which aim to make the motor finance redress scheme fairer and more comprehensive. The changes have narrowed some of the eligibility criteria and defined commission thresholds resulting in estimated payouts dropping from £8.2bn to £7.5bn.
However, the final rules are complex, and many firms’ redress programmes are well underway, with key processes already designed and built. As such, firms will need to assess the policy statement against their current implementation plans to ensure they align with regulatory expectations and deliver good consumer outcomes.
The FCA redress scheme aims to capture as many cases as possible to reduce the need for firms to escalate individual complaints to the Financial Ombudsman Service or to the courts. So, the FCA was keen to include the publicly contested cohort pre-April 2014 and has therefore split the programme into two parts:
This decision recognises the potential legal challenge around agreements entered into before the FCA took over regulation of consumer credit on 1 April 2014. Some firms and claims management companies argue that the FCA cannot run a scheme for the earlier period under its section 404 powers, while the regulator maintains that unfairness under section 140A of the Consumer Credit Act 1974 does not depend on FCA rules. Splitting the scheme allows firms to move forward with redress for the later cohort if the earlier cohort is delayed through legal action.
In line with the consultation, the FCA redress scheme is specifically targeting motor finance agreements that resulted in an unfair relationship between lenders and consumers. The FCA has characterised motor finance agreements as unfair where one or more of the following features were present and not adequately disclosed:
The final rules set out a number of scenarios where agreements can be excluded from redress:
As the FCA has designed the redress scheme for mass-market products, it has also determined that high-value loans are out of scope. These are defined as loans higher than 99.5% of other loans issued that year. Consumers will still be able to address these complaints directly with lenders, with escalation to the Financial Ombudsman Service if needed.
The FCA has introduced an unfairness rebuttal in relation to non-operative tied arrangements. To apply it, firms must demonstrate that the tie didn’t influence broker decision making, so failure to disclose the relationship wasn’t inherently unfair.
The FCA is retaining the ‘no better deal’ (NBD) rebuttal. However, it only applies to cases without a discretionary commission arrangement. Firms must be able to demonstrate that, at the time of the agreement: a lower APR was unavailable with any other lender on the brokers’ panel; or that the broker had processes in place to check if a lower APR was available.
Both rebuttals have a narrow application, and firms must support them with significant contemporaneous data, so they could be tricky to demonstrate in practice. Firms should expect the FCA to closely scrutinise its evidence trail if making use of these rebuttals.
Inadequate disclosure is likely to amount to deliberate concealment under the Limitation Act 1980. As such, the six-year civil limitation period for legal claims will likely run from the point when a consumer could reasonably have discovered an undisclosed arrangement. Given the poor quality of disclosures in the redress scheme timeframe, the FCA does not expect firms to routinely reject claims on that basis.
However, firms can exclude cases that ended before 26 March 2020, if they only include high commission, and if that commission was prominently and clearly disclosed – even if the amount itself wasn’t.
Noting the specific circumstances in the Johnson vs First Rand Supreme Court case, the FCA motor finance policy statement includes redress for comparable situations via the commission repayment/Johnson remedy. Cases with very high commission (totaling at least 50% of the cost of credit, and 22.5% of the loan), plus an undisclosed contractual tie and/or a discretionary commission arrangement will receive commission plus interest. The value of redress is uncapped for these cases.
For all other cases, the FCA is applying a hybrid approach, asking firms to calculate an average of estimated loss (based on an adjusted APR) and commission, plus interest. It sets APR adjustments for use in calculations as follows:
To simplify calculations, the FCA is also using these rates as a proxy for losses in any case featuring high commission or a tie that doesn’t include a discretionary commission arrangement.
Firms can also make an early settlement offer to consumers, set at the level of any of the three redress caps outlined below (see ‘Preventing over-redress’).
Data remains a key challenge for FCA motor finance redress calculations. Although the regulator does propose a range of alternative values to use where data is missing or incomplete, they’re not exhaustive and firms still face gaps when constructing market-adjusted payment schedules. This is particularly problematic when assessing early settlements, so the FCA has introduced a third option to calculate payment schedules:
In line with the FCA motor finance consultation, if early settlement data is missing, firms must assume the loan ran to the full term. Similarly, where data doesn’t exist, firms must assume there are no arrears to consider (both for calculating market-adjusted payment schedules and for setting-off redress amounts). However, firms may set off redress payments against undisputed arrears or defaults.
The changes aim to make redress payments more accurate, consistent and fair for early settlements. However, they do not fully address the complexities involved in other mid-term events such as missed payments, changes to loan terms, or any payment holidays under COVID-19.
Keen to maintain proportionality and maintain growth across the sector, the FCA has capped payments for the hybrid remedy at the lowest of the three values outlined below. While active steps to prevent over-redress are undoubtedly positive, these caps may prove challenging to calculate.
This is equal to 90% of the commission repayment remedy, proposed in the FCA consultation paper, plus simple interest.
This is calculated as the sum of the difference between each actual payment and the payment due if the APR had been in the lowest 5% offered to the market at the time (excluding 0% APR).
Recognising that this is a complex calculation, the FCA notes that the methodology is comparable to the APR adjustment remedy and expects that firms will be able to automate the calculation.
This is calculated as the total cost of credit (plus compensatory interest) from the date of the start of the motor finance agreement. However, many firms won’t have the data needed to calculate this cap, and the FCA hasn’t prescribed an alternative cap value, as the adjusted total cost of credit (see above) is expected to be lower than the total cost of credit.
The FCA motor finance redress scheme is moving quickly, and firms have a short window to implement it, with the following start dates:
From the end of the implementation period, firms have three months to tell consumers who’ve already complained whether they’re due compensation – and if so, how much. From there, individuals have one month to challenge or accept the offer, and firms have one month to make the payment.
Many consumers may be due compensation, but haven’t made a complaint. In this instance, firms have six months from the end of the implementation period to inform those individuals and invite them to join the FCA redress scheme. Consumers wishing to join must respond within six months. There’s no need to contact customers who aren’t eligible for redress, but the customer complaint window for firms will stay open until 31 August 2027.
The FCA is keen to ensure appropriate governance and oversight of the motor finance redress scheme. As such, implementation and delivery must sit with a nominated senior manager, and firms must meet the following reporting requirements:
The forecast report must be updated and sent to the FCA every three months until the firm reaches the end of the scheme – breaking down case numbers into categories, such as exclusions or forecasts for early settlement offers.
The FCA motor finance redress scheme aims to include all affected consumers, while maintaining a proportionate approach for firms. However, it is tricky to strike the right balance, and the final rules are inherently complex.
Many firms have already developed bespoke calculators or are applying off-the-shelf options, which will need to be updated to reflect the final rules. Gaining effective assurance over that work – in terms of regulatory compliance, model design, validation, and governance – will be critical, and is essential for all internal and external stakeholders.
Firms need to start with a gap analysis of their work to date against the final policy statement, and how it differs from the consultation proposals, allocating additional roles and responsibilities accordingly. From there, initial key activities include:
For further information on the FCA motor finance redress scheme contact Darren Castle, Rob Arthur or Supriya Manchanda.
Rising insurer exposure to private credit is attracting increasing regulatory scrutiny, with concerns over transparency and systemic credit, liquidity and underwriting risks.
Stay up to date with our latest round up of financial regulation.
David Morrey and Ben Farmer unpack the FCA’s new sector priority reports and what they really signal for financial services firms in 2026.
