The Supreme Court appeal reviewed three motor finance cases and found against one appellant (Johnson vs FirstRand), paving the way for an FCA redress scheme. As anticipated, this scheme will include redress for consumers affected by discretionary commission arrangements. However, following the Supreme Court judgment the FCA will consider whether non-discretionary commission arrangements should also be in scope of redress.
In the other two cases, the Supreme Court found that brokers have a legitimate commercial interest and do not have a fiduciary duty to consumers. As such, these findings are unlikely to significantly impact the wider consumer credit and lending sector.
FCA redress scheme – an opt-out scheme is likely
The FCA is moving swiftly and will publish its redress consultation by early October, which will remain open for six weeks. The scheme is expected to be launched in 2026, with initial compensation payments beginning the same year. While it hasn’t confirmed whether the scheme will be opt-in or opt-out, the latter seems more probable as the FCA seeks a scheme that is “fair and easy to participate in.” This would reduce the role of claims management companies and maximise compensation value for consumers.
Under this model, firms would be required to contact every borrower who meets the scheme’s criteria. This would be a significant undertaking with challenges over data and how to identify in-scope customers, with the timeframe going back to 2007. The issue will be compounded by data retention rules, and many firms may have deleted the relevant personal information under the General Data Protection Regulation.
Alternatively, the FCA could follow an opt-in approach, asking consumers to submit claims to their motor finance provider – however, this won’t necessarily be any cheaper for firms. Additionally, many consumers could go through a claims management company, creating opportunities for fraud and resulting in unnecessary costs for consumers – especially for vulnerable customers.
Redress considerations
The redress scheme will primarily focus on discretionary commission arrangements which allowed brokers to adjust interest rates for consumers and influenced the levels of commission paid by lenders. These arrangements, banned by the FCA in 2021, were widespread and affected around three quarters of all motor finance lending from 2007 to 2020. Use of discretionary commission arrangements most likely won’t warrant redress in their own right, but could if they weren’t adequately disclosed.
The Supreme Court judgment means that redress may also be due if there’s evidence of an unfair relationship between the lender and the consumer – regardless of whether there was a discretionary or non-discretionary arrangement in place. Under section 140 of the Consumer Credit Act, lenders need to make sure terms are fair; that they have enforced their rights in a reasonable way; and any other action or inaction on their behalf is appropriate. The FCA notes key factors such as the size and nature of the commission, extent of disclosure, regulatory compliance and consumer characteristics. The last point could prove particularly challenging given the nature of information obtained from customers at the start of motor finance arrangements.
In terms of calculation methodology, the FCA is keen to balance the degree of consumer harm with the need to continue to provide accessible motor finance. Following the Supreme Court judgment there could be two broad approaches to redress calculation. One may be based around the amount of commission paid to the credit broker. The other could factor in any interest rate differential that the consumer incurred as a result of the commission arrangement. The FCA may also consider if there should be a minimum threshold for redress payments, and has noted that redress is unlikely to exceed the cost of commission.
Changes to commission rules
Many commentators had anticipated a broader read-across from the Supreme Court ruling to the wider consumer credit sector. Following the judgment, this seems less likely with the immediate regulatory focus being the motor finance redress scheme. However, the FCA could undertake additional reviews and implement further rule changes to the motor finance and broader lending sector.
The regulator’s carrying out a lot of work to assess fair value pricing and the impact on competition in the context of Consumer Duty. Moving forward, this will undoubtedly factor in key considerations from the motor finance Supreme Court judgment to ensure the sector continues to meet good practice. The FCA will want to make sure all credit agreements represent a fair relationship between the lender and consumer, with appropriate and transparent commission practices.
Implications for M&A activity
Looking beyond the regulatory aspect, greater legal clarity over motor finances exposures could increase M&A activity across the vehicle finance and wider lending sector. Uncertainty had led to valuation mismatches and stalled M&A processes. Already, the public market reaction has been positive and key stocks have seen significant increases in market capitalisation.
While there are significant exposures relating to historical commission arrangements, buyers now have more information to estimate the scale of that redress. Assets with limited pre-2021 exposure and strong compliance records are likely to command premium multiples. Large institutions and private equity funds could see this as an opportunity to acquire platforms at attractive risk-adjusted valuations.
Next steps for the financial sector
While the Supreme Court ruling provides a general direction of travel, the FCA’s October consultation will offer more clarity over the redress scheme, which is estimated to cost around £9-18 billion. The regulator may also extend the current complaints deadline of 4 December 2025 so that it aligns with the timetable for compensation payments under the proposed scheme.
In the meantime, firms should review financial forecasts and potential scope criteria, which will still have significant resource implications for firms, despite being narrower than the potential worst-case scenarios. This could significantly influence future business and strategic planning.
Given that the redress scheme reaches as far back as 2007, many firms may have deleted older customer data in line with data protection regulations. This makes it essential for firms to leverage every available tool to gather both structured and unstructured data from across various systems. Technologies such as AI and advanced analytics tools can play a critical role in consolidating and interpreting this information to build a clearer understanding of each consumer agreement. Identifying the relevant customer population will be challenging, and demonstrating that fair relationships existed may prove even more so. Therefore, making the most of all accessible data sources will be vital.
Looking ahead, the consumer credit sector must continue to ensure their commission arrangements are appropriate. This includes ensuring they are proportionate, that they represent a fair relationship with the client and continue to meet all regulatory expectations.
