The FCA’s proposed redress scheme marks a pivotal moment for the motor finance sector, with lenders facing billions in potential compensation over historic commission practices. With the consultation now ended and final rules expected in early 2026, firms must now prepare for complex portfolio reviews, operational overhaul, and direct engagement with millions of affected customers — all under intense regulatory scrutiny.

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On October 7^th the Financial Conduct Authority (FCA) finally produced its consultation paper on the scheme to redress consumers over commission arrangements in car finance transaction. The consultation paper has been hotly anticipated since the FCA announced that it was coming back in August, prompted by the Supreme Court judgement in the cases Hopcraft v Close Brothers Ltd, Johnson v FirstRand Bank Ltd, and Wrench v FirstRand Bank Ltd. These hard fought cases ultimately determined that the commission paid by lenders to car dealers breached a duty car dealers owed to their customers. This FCA paper confirmed the details of the proposed redress the industry will take in response to that breach. It also reveals which consumers will be eligible for that redress.

The FCA has extended its motor finance redress consultation deadline to 12 December, citing feedback that firms are struggling to analyse the extensive market-wide data required. Final rules are now expected in February or March 2026, suggesting the regulator is responding to calls for more time from across the sector.

Richard Pinch, Senior Risk Director at Broadstone, noted that the proposed compensation scheme “will likely have a much greater impact than the sector expected,” adding that the FCA’s decision to extend the timeline “appears” to reflect lenders’ concerns.

Calculating the redress

In short, those proposals amount to compensation for consumers, including sole traders, small partnerships and unincorporated bodies, who have engaged in purchases where the relationship between the consumer and lender is held to have been unfair.

Consumers will be eligible if they took out a regulated motor finance agreement between the 6^th of April 2007, and the 1^st of November 2024, where commission was payable by the lender to the broker. Specifically, the finance agreement will be found to have been unfair if there was not adequate disclosure of discretionary commission arrangements, if the commission was equal to or greater than 35% of the total cost of credit and 10% of the loan, or if there were contractual ties that gave the lender exclusivity or a right of first refusal.

For the transactions that meet that criteria, lenders calculate the consumer’s compensation in one of the several ways. For most cases, the compensation will be based on an average of the amount overpaid and the commission paid, plus base rate interest plus 1%. However, in the rarer but most extreme cases, such as the one that triggered the Johnson v FirstRand Bank Ltd case, the lender must pay the consumer the commission plus interest.

It is a proposal that potentially includes 44% of all motor finance deals made since 2007.

The FCA estimate that ultimately consumers will receive around £8.2 billion in compensation. On top of that, it is expected that simply implementing the scheme will cost the FCA another £2.8 billion, based on the assumption that 85% of eligible consumers will opt into the scheme receiving approximately £700.

The cost of compensation

Lenders who are found to owe redress under these criteria will have an opportunity to rebut accusations of unfairness, but the FCA believes such occasions will be rare.

“Its redress methodology aims to combine the overpaid commission plus interest and the Regulator’s own estimation of loss – taking into account that the loan with commission may have been at a different interest rate than the market norm,” commented Darren Richards, Head of Insurance, Regulatory & Risk at independent financial services consultancy Broadstone, when the consultation paper was released. “By averaging these two numbers the FCA is attempting to produce a fairer outcome for consumers.”

Richards also pointed out the scale of the work ahead of the motor finance sector.

“Implementing this compensation scheme will be a significant exercise for finance companies who will need to review all of their DCA cases, assess whether they are unfair and then calculate potential redress,” Richards said. “Once the consultation is completed lenders will have clarity over the FCA’s scheme to begin the process of contacting the over four million customers who have made complaints, plus the remainder to be included in the scheme, to calculate and pay due redress to customers as soon as possible.”

Given the scale of the redress and what it asks of the industry, it is not surprising that the industry itself has responded with alarm to the FCA’s figures.

The Finance & Leasing Association (FLA) has shared concerns that the FCA’s proposals are so broad that they will compensate customers even if they have not suffered a loss. They argue there needs to be a requirement for proportionality on the part of the regulator, or the redress will impact growth and competition in the motor finance sector.

On the 15^th of October the CEO of the FCA, Nikhil Rathi appeared before the House of Lords Financial Regulation Committee and reiterated that the consultation paper is just that, a consultation, and the FCA would listen to the responses it heard from the industry. However, Rathi also rejected suggestions that it would need to recalibrate its proposed methodology for the redress scheme.

The CEO of the Finance & Leasing Association, Shanika Amarasekara responded to Rathi’s comments by saying, “Motor finance underpins the UK’s mobility and productivity. Getting this scheme right matters – not only to remedy past issues, but to safeguard consumers’ access to affordable credit for the future. I appreciate that the regulator has a job to do, but so too have the legal, economic and compliance experts who have reviewed the proposals and found them to be wide of the mark if efficiency and proportionality were the objectives.”

Amarasekara has also said that the consultation process itself is floored, not allowing enough time for the industry to respond.

“A consultation of this size, complexity and economic importance would ordinarily run for three months, yet this one is being completed in just six weeks. The onus is now on the FCA to listen carefully to industry evidence – because a badly designed remedy risks creating new problems rather than resolving old ones,” Amarasekara says said. “The FLA and its members will continue to work with the FCA, Parliament, and other stakeholders to ensure redress is fair, proportionate, and sustainable.”

Ensuring fairness

The FCA, meanwhile are arguing that the scale and speed of the redress process are necessary to ensure fairness for consumers.

A spokesperson for the FCA said: “Many motor finance lenders did not comply with the law or the rules. It’s time their customers get fair compensation. Recent court judgments show that liabilities exist no matter what. We believe our scheme is the best way to settle the issue for both consumers and firms, and alternatives would be more costly and take longer. We are open to well evidenced feedback during the consultation period.”

The FCA spokesperson also argues that the process needs to be carried out promptly to reinforce consumer confidence and secure the future of the market.

“We recognise not everyone will get everything they would like,” the FCA spokesperson said. “But it’s vital we draw a line under the issue so a trusted motor finance market can continue to serve millions of families every year.”

However, Adrian Dally, Director of Motor Finance at the FLA, still believes a more precise instrument is needed to dictate who will be compensated under the redress.

“The FCA’s criteria for assessing liability is set so broadly that it would compensate customers who suffered no loss at all,” Dally tells us. “For instance, the regulator says inadequate disclosure of a DCA is sufficient to make an agreement unfair. But many customers who had DCAs suffered no loss at all because the interest rate was moved down to keep the deal as competitive as possible.”

It is an argument the FCA denies, saying that they have set out the key factors of the proposed scheme, including the scope and design, how redress should be calculated, as well as the total cost of redress. They also direct lenders to further detailed analysis is set out in the consultation paper’s cost benefit analysis. Furthermore, they also argue that the onus for the compensation needs to be placed on the industry, not the consumers.

“We said in our statement that an alternative to a compensation scheme would require consumers to complain to firms, then to the Financial Ombudsman Service if dissatisfied with the firm’s response, or through the courts,” the FCA spokesperson says. “This would result in significantly higher administrative and legal costs for firms and consumers, lengthy delays and uncertain outcomes for all involved.”

However, Dally argues that a fairer figure would be “Significantly less than current estimations, and to a level where a consumer is compensated in proportion to their loss.”

What that number might look like, however, remains to be seen.

The practicalities of the redress

On the day the FCA released their consultation paper, it also issued a letter to lenders setting out what they need to do to prepare.

“The consultation paper also sets out exactly what lenders will have to do when the redress scheme is up and running,” the FCA spokesperson says.

That letter begins by stating “It is crucial lenders and brokers do not await the outcome of our consultation and prepare now to deal with their existing portfolio of complaints and for a potential redress scheme.”

It goes on to instruct firms to identify when they need to issue a final response to their existing portfolio of leasing complaints (based on the date the complaints were received), and prepare how they intend to handle and determine these complaints in accordance with the eight-week complaint handling requirements. They must also continue to collect evidence that could help with the eventual resolution of the complaint, and must progress complaints including issues that would fall outside the scope of any scheme, such as affordability, forbearance or other aspects of lending and broking in accordance with existing complaint handling rules under DISP.

“S404 redress schemes prescribe how redress should be paid, and lenders will follow the requirements once the size, scope and application of the process is confirmed,” Dally tells us. “They are fully committed to providing redress quickly and easily to customers who suffered loss.”

Indeed, despite objections to the FCA’s proposals, the FLA have repeatedly stated that its members are keen to compensate customers who it sees as having suffered losses through these business practices.

“Our members are keen to ensure that any customer who suffered loss is compensated quickly and easily,” Dally says. “In small firms this may be more of a challenge but once we see what the final process looks like, we will provide help where needed.”

An end to the matter

However, even given the proposed scale of the redress as it stands, there still remains the question of whether all of these measures will serve to draw a line under the whole dealer commissions controversy.

Dally states “That is really a question for the regulator.”

But the FCA spokesperson that speaks with us offers an unambiguous “Yes.”

Pointing to the consultation paper, the FCA spokesperson tells us the redress scheme will “Give affected consumers certainty that they have had the opportunity to secure compensation, and firms and investors finality by drawing a line under this issue.”

“Under our proposals, those with a motor finance complaint about inadequate disclosure of a commission or tie that doesn’t involve a DCA, high commission or contractual tie that give lenders first right of refusal or exclusivity, would not receive compensation under the scheme,” the FCA spokesperson says. “They would have the right to test this with the Financial Ombudsman, but would only get a different outcome if it decides the scheme rules weren’t followed. They could still make a claim in court. This will help draw a line under the issue.”

But that line has not been drawn yet. Already, lenders in the motor finance sector are challenging the FCA to seek an extension to the six-week consultation report. The Times has reported that several of the larger banks are requesting more time to respond, a request the FCA has already rejected.

Speaking to the Times, the FCA said, “We are moving at pace, having engaged for months on a possible scheme and timetable. Now the courts are clear that liabilities exist, consumers should be compensated quickly, so lenders can draw a line under this. Complaints cannot be paused indefinitely. We will keep working constructively with lenders to help them digest all the material swiftly, while welcoming feedback on our proposals by the deadline.”