The FCA’s Motor Finance Redress Scheme: legal clarity and consumer compensation

Executive Summary

The Financial Conduct Authority (FCA) has launched a 360-page consultation on a sweeping Motor Finance Consumer Redress Scheme (CP25/27), following the Supreme Court’s landmark decision in August 2025 in Johnson v FirstRand Bank Ltd.

Drawing on lessons from previous mass redress events (e.g. PPI, Arch Cru, British Steel Pension Scheme), this Scheme aims to address systemic failures in the disclosure of commission arrangements in motor finance, affecting millions of agreements and resulting in significant compensation for consumers.

Background

• 2021: FCA bans discretionary commission arrangements.
• 2024: FCA reviews industry practices.
• August 2025: Supreme Court rules lenders acted unlawfully by failing to disclose high commissions and contractual ties to unsophisticated customers.
• 3 August 2025: FCA announces intent to proceed with a redress scheme.
• 7 October 2025: FCA outlines a four-stage redress process.

Scope and coverage

Any regulated motor finance agreement entered into between 6 April 2007 (when the “unfair relationships” provision of the CCA, and Financial Ombudsman Service jurisdiction for consumer credit, took effect) and 1 November 2024 (a week after the Court of Appeal judgment in Johnson) where there was ‘inadequate disclosure’ of a ‘relevant arrangement’.

The Four-stage redress process

1. Identification

All relevant agreements within the specified period are included.

2. Liability assessment

Lenders must assess whether an unfair relationship existed. There are three broad categories of ‘relevant arrangements’.

• A discretionary commission arrangement (DCA). The lender will have the burden of proving that there was adequate disclosure not just of the fact that commission was paid, but also the structure of the arrangement.
• High commission (set at ≥35% of total credit cost and 10%). Again, the lender will have the burden of proving that this was disclosed or given in information that enabled the consumer to easily work it out.
• A commercial tie with exclusivity or an offer of first refusal.

3. Redress calculation

Three potential remedies:

• Commission Repayment Remedy: For rare cases aligning with Johnson (where commission was ≥50% of the total charge for credit and 22.5% of the loan)
• APR Adjustment Remedy: A reduced APR of 17% over the agreement’s life if this results in higher compensation.
• Hybrid Remedy: The average of the above two, used in most cases unless the APR adjustment is higher.

Simple interest will be added, calculated at the Bank of England base rate plus 1% per year, with an estimated average of 2.09%.

4. Payment and acceptance

Consumers will have one month to accept or reject the lender’s provisional redress decision, including the interest calculation.

Opt-in or opt-out?

Both. Where customers have already complained to lenders, they will be considered to have effectively opted in. Otherwise, lenders will have to write to consumers to invite them to opt-in, who will then have 6 months within which to do so.

Financial impact

• Number of agreements likely affected: 14.2 million
• Estimated redress: £8.2 billion
• Implementation costs: £2.8 billion
• Total cost: £11 billion
• Average compensation: £700 per agreement

Strengths of the scheme

• Legal Certainty: Closely follows Supreme Court and High Court guidance, providing a clear legal basis.
• Operational Feasibility: Scalable, avoiding case-by-case assessments for millions of agreements.
• Transparency: FCA is open about data limitations and invites feedback on all key aspects.
• Consumer Accessibility: Proactive contact, opt-in/out mechanisms, and clear firm communication.
• Market Stability: Expected to reduce uncertainty and administrative costs, supporting market integrity.

Key concerns

• Hybrid Compensation Formula: Balances scale and legal context but may not always reflect actual consumer detriment.
• Presumptions of Unfairness: the Scheme, being Consumer Duty centric, leans heavily on regulatory disclosure failures rather than evidence of individual harm, risking overcompensation and arbitrary outcomes.
• Data Limitations: FCA’s modelling is based on a very small sample (4,000 files out of 14.2 million agreements).
• Risk of Windfalls: the presumption of unfairness and loss is not tempered by meaningful rebuttal opportunities for lenders.
• Legal Challenge Risk: The Scheme’s perceived arbitrariness could invite legal challenges.
• Lack of Lender Remedies: No provisions for lenders to recover from dealers/brokers.
• De minimis: A de minimis threshold for low-value claims ought to be set to avoid disproportionate costs and windfalls.
• Clarity: There should be clear, objective rules and meaningful rebuttal opportunities for firms.

Timescales

The consultation closes on 18 November 2025, with final rules expected in early 2026 and scheme launch anticipated mid-2026. The FCA will confirm by 4 December 2025 whether complaint-handling deadlines will be extended.

Conclusion

While the FCA’s Motor Finance Redress Scheme is a bold and necessary step towards consumer compensation, it is not without flaws.

The balance between operational simplicity and the risk of overcompensation is real.

Moreover, unless from a costs/benefit perspective, the sector chooses to bite the bullet and just foot the bill and move on, hoping that consumers plough their winnings (and perhaps over many agreements between 2007-2024) into buying another car, rather than subject itself to the uncertainty and scrutiny of claims through the Courts, there is a risk that this scheme will be seen as arbitrary and be vulnerable to legal challenge.

What is very clear is that lenders and brokers should take steps now to prepare.

• Establish strong governance: Set up a dedicated program team with clear oversight and ensure direct reporting to senior leadership.
• Appoint a Senior Manager: Lenders should assign overall responsibility for the scheme to a Senior Manager. The FCA may also require an attestation of adequate preparatory steps.
• Develop reporting frameworks: Create watertight reporting and quality assurance controls that can withstand regulatory scrutiny.
• Plan resources: Assess if existing staff have the capacity and skills for a large-scale remediation project. Firms may need to seek external support or technology solutions.
• Make adequate financial provisions: Update your assessment of potential liabilities to ensure adequate financial resources. This should cover both compensation and administrative costs.
• Prepare for different customer intake models: Note that customers who have already complained will be included in the scheme automatically (unless they opt out). Uncomplaining customers will need to be contacted and invited to opt-in.
• Prepare your communications strategy: Develop clear, empathetic, and compliant communication plans for affected customers. The FCA will also launch its own awareness campaign.
• Engage with the consultation: The FCA is actively seeking feedback on its proposals until November 18, 2025.
• Report potential issues: Notify the FCA immediately if your firm is unlikely to have adequate financial resources to meet its potential liabilities.
• Take legal advice.

If you have any questions or need any further guidance, contact Jon Butler of the Geldards Automotive Team