The UK motor finance industry is facing fresh disruption after the Financial Conduct Authority (FCA) confirmed plans to launch a consultation into a redress scheme that could cost lenders and brokers as much as £18 billion.

The announcement — following a Supreme Court ruling last Friday — reintroduces significant financial and operational uncertainty for motor finance providers. While the FCA said most drivers would receive no more than £950 each, the total cost to the industry is now estimated at between £9 billion and £18 billion.

Paul Hollick, Chair of the Association of Fleet Professionals (AFP), said: “We’ve gone from a situation on Friday where the Supreme Court verdicts suggested the worst risks for the motor finance sector had been removed, to one on Monday morning where the FCA’s intervention has reintroduced the possibility of quite widespread reparations.”

The FCA’s move relates to discretionary commission arrangements (DCAs), which allowed dealers to set interest rates on car finance agreements and pocket the difference as commission — often without the customer’s knowledge. These practices were banned in 2021, but many were in place across millions of loans issued between 2007 and 2021.

FCA Chief Executive Nikhil Rathi said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated.” He added that the FCA aims to build a scheme that is “fair and easy to participate in,” with no need for consumers to use a lawyer or claims management company (CMC). “If you do, it will cost you a significant chunk of any money you get,” he warned.

Industry pushback

However, several industry figures questioned the FCA’s legal and practical basis for retrospective compensation — particularly when many firms operated within then-accepted frameworks.

Paul Bennett, a consultant with Madox Square Advisory, was cited on LinkedIn as saying: “This statement leaves me somewhat perplexed because, until discretionary charges were banned in 2021, financiers in concert with their introducers operated within the law. As such, how can firms be penalised in 2025 for what was accepted business practice until 2021?”

Stephen Haddrill, Director General of the Finance & Leasing Association (FLA), expressed concern over the FCA’s intention to look as far back as 2007. “We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information, and the evidence base will be patchy at best.”

Speaking to BBC Radio 4’s Today programme, he added: “I just think that is completely impractical. It is not just firms that don’t have the details about contracts back then, customers don’t either.”

Dealers urged to review historical agreements

Jonathan Butler, legal counsel at the Vehicle Remarketing Association (VRA) and partner at Geldards, said: “We shouldn’t lose sight of the fact that this is good news for dealers and lenders” given that the exposure is far less than the £44 billion feared. However, he warned of extensive preparatory work ahead.

“Dealers and lenders are now in a position where they can start to calculate their exposure. They should be tracking down all relevant paperwork dating back to the 2007 cut-off point,” Butler said.

He also flagged potential legal minefields in legacy dealer agreements: “Dealers need to read their old contracts with motor finance providers to check there is no form of indemnity in place that protects the lender in the event of claims of the type now envisaged. These did sometimes exist and, if enforced, may cause issues.”

Butler added that the redress scheme could be hampered by evidentiary complexity: “The Johnson-type threshold is actually a value judgment… These are highly fact sensitive matters and not questions that… could be easily answered using anything other than an arbitrary and automated process. It needs qualified people to make assessments… that is potentially an enormous task.”

CMC industry faces collapse

The FCA’s announcement is also likely to have a profound effect on the claims management sector, which had anticipated a much wider liability ruling from the Supreme Court.

John Perez, Partner and Head of Finance Litigation at DWF, said: “The CMC industry that has emerged in pursuing these claims on mass will likely now collapse.” He explained that under the ruling, “any continuing claims will all be fact dependant on the nature of the individual transactions,” meaning the days of high-volume, generic CMC-driven claims are effectively over.

Perez noted the court’s ruling in Canada Square v Johnson clarified that “no disclosure of commission or partial disclosure of commission will not in itself render the relationship unfair.” Instead, courts must evaluate multiple factors — including the size of the commission relative to the total credit cost (as in the Johnson case, where it was 55%) and whether the dealer made misleading representations.

He suggested the FCA may borrow from the approach taken in the PPI and Plevin redress schemes, potentially setting a commission threshold — such as 50% of the total charge for credit — above which redress would be automatic.

Retail perspective: fairness and stability needed

Sue Robinson, Chief Executive of the National Franchised Dealers Association (NFDA), welcomed the Supreme Court’s judgment and its recognition of the sector’s submissions. “As the consumer facing part of the sector, NFDA want to see the regulator act fairly to ensure that UK consumers receive a satisfactory result. This has been achieved today,” she said.

Robinson emphasised the importance of a stable retail environment, noting that “automotive retail accounts for approximately 78% of the broader automotive workforce.”