The UK’s Financial Conduct Authority (FCA) has announced a consultation aimed at establishing a compensation framework for consumers affected by unfair motor finance practices.  

The regulatory body’s investigation into historical motor finance transactions has revealed widespread non-compliance with legal and disclosure requirements by lending companies. 

Following a Supreme Court decision, it has been clarified that while commission payments in motor finance can be lawful, certain practices surrounding them may constitute unfair, and thus illegal, conduct.  

This pertains particularly to the size of commissions paid to dealers and the transparency with which they were disclosed to consumers. 

The FCA’s consultation will outline how companies should review past agreements to assess lender-consumer fairness and determine compensation. 

The evaluation will consider a combination of factors, including undisclosed commission details, the nature of business relationships and the level of consumer understanding. 

The scope will include discretionary commission models, where brokers had the authority to alter customer interest rates without adequate disclosure.  

The FCA will also seek input on the inclusion of fixed commission models within the redress scheme. 

The approach to calculating compensation will be influenced by the consumer harm level and the necessity for continued access to affordable motor finance options.  

The FCA suggests an annual interest rate for the scheme calculated at the average base rate for the year plus an additional 1%, which would roughly equate to an annual simple interest rate of 3%. 

The FCA intends for the scheme to encompass agreements from 2007 onwards, aligning with the Financial Ombudsman Service’s jurisdiction and ensuring the scheme’s thoroughness.  

The estimated compensation for most affected individuals is expected to be under $950 per finance agreement. 

Firms are not currently obliged to resolve relevant motor finance complaints until 4 December 2025. The FCA is contemplating an extension of this deadline to match the proposed scheme’s compensation distribution schedule. 

The regulatory body plans to release the consultation by early October, with a six-week response period. Decisions regarding the scheme remain provisional, with the FCA aiming to establish the final rules in time for a 2026 launch.  

In July 2025, the FCA found that external cost pressures are driving motor insurance premium increases.