This week we shine a spotlight on the proposed motor finance compensation scheme. With the total cost estimated to be around £11 billion, this could equate to consumers being compensated on average around £700 per agreement as a result of unfair contracts and shortcomings in disclosures. In designing a proposed scheme for such a complex matter, the Financial Conduct Authority (FCA) recognises there are trade-offs in terms of optimal consumer outcomes and the long-term prosperity of the market. Concurrently, the FCA and other regulators have joined forces to tackle poor claims management practices.
Meanwhile, in our final item this week, firms look to the FCA to do more to support growth and innovation, and to streamline its approach to supervision.
FCA unveils consultation on motor finance redress scheme
The FCA has finally published its consultation paper for an industry-wide motor finance redress scheme. The scheme could result in compensation of £8.2 billion across some 14 million motor finance agreements taken out between April 2007 and November 2024, with an estimated average payout of £700 per agreement.
Following the Supreme Court’s landmark judgment back in August, in which it sided with the customer in one of three motor finance cases, the regulator confirmed that it would launch a consultation on a potential compensation scheme for similarly affected customers. This included those who were affected by ‘discretionary commission arrangements’ – a practice where dealers received a commission from finance lenders based on the interest rate charged to the customer, without disclosing this commission to the customer. This meant that dealers had an incentive to charge customers a higher interest rate, as they would receive a higher commission, while the customer was left at risk of overpaying for their motor finance. The practice was outlawed in 2021, but many consumers were affected before the ban was put in place.
Now, the FCA has announced that its proposed scheme would be open to customers who:
- were subject to a discretionary commission arrangement
- entered into finance agreements where the broker received particularly high commission (at least 35% of the total cost of credit and 10% of the loan amount)
- were subject to contractual ties which gave a lender exclusivity or a right of first refusal.
With an estimated four million complaints already submitted by customers who feel they may have been affected, the proposed scheme would see those customers contacted within the first three months. Next, firms would be expected to identify affected customers who haven't submitted a complaint, and contact these customers within six months to give them the opportunity to opt into the scheme. Any customers who weren't contacted would be able to make a claim directly with their firm, and would have one year from the start of the scheme to do so.
The FCA feels that a redress scheme would ensure a cost-effective process for both consumers and firms. Without a scheme, it's highlighted, many cases would go through the courts or the Financial Ombudsman Service, resulting in far higher administrative and legal costs. The regulator does concede, however, that many consumers may still choose to take their case through the courts in the hope of receiving higher compensation.
The consultation is open for responses until 18 November 2025. If it's decided that a redress scheme will go ahead, it's expected that a final policy statement and rules will be published by early 2026, with consumers beginning to receive compensation by the end of 2026.
Read more on motor finance redress and what ot means for firms
Read more on 14m unfair motor loans due compensation under FCA-proposed scheme
Read more on the FCA consultation on motor finance compensation scheme
Action on poor claims management
The FCA and Solicitors Regulation Authority (SRA) are taking joint action to address misleading advertising and poor practices in motor finance claims. Consumers have been found to be signing contracts without full disclosure, facing high exit fees when they try to leave. Using powers under the Consumer Rights Act 2015 and the new Digital Markets Act of 2024, nine law firms were asked to clarify their exit fees while two claims management companies (CMC) have agreed to change their policies and two have paused operations until they're able to show the FCA that they're compliant.
Since January 2024, the FCA has removed or amended over 740 misleading ads and has introduced a £1 million campaign informing consumers that they're able to claim compensation without using a CMC or law firm, to help in avoiding unnecessary fees. Research shows that 4 in 10 people didn't know they were able to do this.
Further to this, the SRA is investigating 76 law firms and has shut down five. The Information Commissioner's Office (ICO) has also received over 230,000 complaints about unlawful marketing and is pursuing investigations. The ASA is also reviewing advertising practices, and these various regulators continue working together to protect consumers and inform standards.
Off the back of this work, the regulators are advising consumers who have been misled by advertising, or feel they have been treated unfairly by a CMC or law firm should in the first instance complain to the firm and then if necessary, take their complaint to the Claims Management Ombudsman or the Legal Ombudsman.
Read more on the regulators approach towards poor claims management practices
FCA survey highlights industry priorities
The latest survey from the FCA and Practitioner Panel underscores a cautiously positive industry sentiment, but flags key areas for improvement. Most firms report satisfaction with the FCA’s performance, yet call for greater proportionality in regulation, simpler rulebooks, and reduced data burdens. Respondents also stress the need for clearer alignment between regulatory priorities and growth objectives, particularly as the FCA embeds its secondary competitiveness mandate.
The FCA has pledged action, including streamlining rules, enhancing engagement with smaller firms, and improving transparency through its Cost Benefit Analysis Panel. Work is also underway to modernise redress systems and advance the Advice Guidance Boundary Review, alongside initiatives to support innovation and pensions reform.
Firms should review their Consumer Duty implementation and prepare for upcoming consultations on rule simplification and data collection reforms.
Read more on the FCA and Practitioner Panel 2024/25 survey findings
