Motor finance redress: what you need to know

A redress scheme is a process for firms to assess if they have breached regulatory requirements and, if so, to pay compensation to customers. 

Not all redress schemes are strictly mandated by the FCA and firms can (and often do) implement their own voluntary redress schemes. Firms may, for example, decide to implement voluntary redress schemes as part of strategic remedial measures to either deter the FCA from further enforcement action, or by way of a settlement with the FCA during or at the conclusion of formal enforcement action. 

The FCA may exercise its power (under section 404 FSMA) to impose a redress scheme on multiple firms in response to industry wide failings where there is scope for significant customer detriment (an FCA Redress Scheme). As this is a rule-making power, the FCA is required to publicly consult on the proposed rules and to conduct a cost-benefit analysis of the proposed scheme.

In addition to being simpler and easier for consumers to navigate, an FCA redress scheme has the benefit of being more orderly and efficient for firms than a complaints led approach involving a large number of cases being heard in the courts and/or by the Financial Ombudsman Service (FOS). 

The FCA has imposed two previous section 404 industry-wide redress schemes, both of which were on a much smaller scale than the proposed motor finance redress scheme.

The first (in 2013) related to unsuitable advice to invest in the CF Arch Cru Investment and Diversified Funds. It was an opt-in scheme.

The second (in 2022) related to members of the British Steel Pension Scheme who received unsuitable advice to transfer out of the scheme. This was an opt-out scheme.

The FCA has also overseen other types of redress schemes in the past, including:

• a voluntary scheme relating to the mis-selling of internet rate hedging products, where the FCA reached agreement with nine banks to set up the scheme; and
• the PPI redress exercise, which relied on the internal complaints handling processes of the relevant firms. The FCA has acknowledged that it learned important lessons from the PPI redress exercise regarding the effective delivery of consumer redress. As a result, the FCA now seeks to implement redress exercises that are more robust, focused on outcomes, and designed to ensure that redress is delivered within a clearly defined timeframe.

The FCA can only use its power under section 404 FSMA to mandate an FCA Redress Scheme where: 

• it appears to the FCA that there may have been a widespread or regular failure by relevant firms to comply with requirements applicable to the relevant activity (in this case the provision of motor finance);
• it appears to the FCA that, as a result, consumers have suffered (or may suffer) loss or damage in respect of which, if they brought legal proceedings, a remedy or relief would be available in the proceedings; and
• the FCA considers that it is desirable to make rules for the purpose of ensuring that redress is made to the consumers in respect of the failure (having regard to other ways in which consumers may obtain redress).

It has confirmed that it will consult on implementing a section 404 redress scheme with respect to the motor finance market.

Each firm within the scope of a redress scheme is responsible for determining whether customers have suffered detriment due to its conduct, although the firm must follow the FCA’s rules establishing a framework for the relevant FCA redress scheme (including with respect to the calculation of any redress due). 

The proposed rules on the motor finance redress scheme will be set out in the FCA’s consultation paper to be published in October. The FCA has said that it will consult on how firms should conduct the unfairness assessment for the purposes of the scheme and how compensation should be calculated.  

The fact that a firm falls within the scope of an FCA redress scheme does not mean that every customer of that firm will automatically receive compensation. The firm must comply with the rules of the scheme and investigate each individual case which falls within the scope of the scheme (whether on an opt-in or opt-out basis) to assess whether, and if so, how much compensation is payable to the customer. 

The method for calculating compensation under the motor finance redress scheme will be established following the FCA’s consultation process. The FCA acknowledges that there are several possible approaches to calculating redress and intends to consult on different options, including the potential introduction of a de minimis threshold.

Recent case law illustrates the range of possible outcomes. In the Supreme Court case of Johnson, Mr Johnson was awarded full repayment of the commission paid to the broker. In contrast, in the case currently under judicial review before the Court of Appeal (Clydesdale Financial Services Ltd v Financial Ombudsman Service Ltd), the Financial Ombudsman Service awarded the consumer the difference between the payments actually made and the payments that would have been made had the interest rate been set at the lowest agreed rate.

The design and scope of the motor finance scheme will be determined following the consultation process to be undertaken by the FCA. The FCA has outlined a number of key principles which will need to be carefully balanced and considered in designing the scheme. These include: fairness to consumers; certainty; simplicity; cost effectiveness; timeliness; transparency; and market integrity.

The precise scope of the motor finance redress scheme will depend on a number of factors, including:

• Opt-in or opt-out mechanism - The scheme could be structured in various ways, such as:
  • Opt-out: All relevant customers are included in the redress scheme review, unless they proactively opt out.
  • Opt-in by invitation: Firms must first assess which consumers fall within the scope of the redress scheme and invite relevant customers to opt-in to have their case assessed by reference to the redress methodology framework.
  • Opt-in by advertisement: The scheme could be advertised, and firms would only investigate consumers who actively opt-in.
• Scope of review period - The FCA has proposed a relevant period from 2007 (the year in which the FOS obtained jurisdiction over consumer credit business) to 2021 (the year in which discretionary commission arrangements (DCAs) were prohibited by the FCA). The FCA did not become the regulator for consumer credit until April 2014, when the responsibilities were transferred from the Office of Fair Trading. The FCA would therefore need Government approval to cover agreements dating back to 2007 and this is likely to be an area of particular focus during the consultation process. The House of Lords Financial Services Regulation Committee (the FSR Committee) has already raised concerns about this proposal. In a letter to the FCA dated 8 August 2025, the FSR Committee asked the FCA to explain the legal basis underpinning the FCA’s proposed timeframe. The FCA will appear before the Committee in September 2-25 to respond to its concerns.
• The application and weighting of the unfair relationship factors - The FCA has stated that it will need to consider how the range of factors referenced by the Supreme Court (which are non-exhaustive) must be assessed together when considering whether a relationship between a lender and consumer was unfair. In particular, the FCA will consider what size of commission may point towards unfairness if not disclosed. In the PPI redress scheme (following the Supreme Court decision in Plevin v Paragon Personal Finance Ltd), the FCA adopted a tipping point of commission which was more than 50% of the premium paid, above which firms should presume that the failure to disclose commission would give rise to an unfair relationship. Compensation was limited to the excess commission over the 50% tipping point.
• The extent to which non-DCAs are included - See question seven below.

The FCA has stated that the proposed FCA redress scheme will cover DCAs and that it will consult on which non-DCAs should be included.

This will be a key focus of the FCA’s consultation on motor finance redress. The Supreme Court held that the test of unfairness under section 140A of the CCA engages a very broad range of factors and is highly fact-sensitive. The nature of the commission arrangement is one factor to be considered. Other relevant, non-exhaustive, factors include: (i) the size of the commission; (ii) the nature of the consumer; (iii) the extent and manner of the disclosure; and (iv) compliance with regulatory rules.

In Mr Johnson’s case, there was no payment of discretionary commission, yet it was still found to be an unfair relationship based on: (i) the size of the commission paid by the dealer; (ii) the lack of disclosure as to the commercial tie between the lender and the dealer in which the lender had a right of first refusal; and (iii) the characteristics of Mr Johnson in that he was commercially unsophisticated and could not be expected to have read the relevant statements in the documents where no prominence was given to them.

The FCA has provided a preliminary estimated range of £9bn to £18bn for the total cost of the scheme, including administrative costs (which it has noted could run into the several billions depending on the scope of the review). 

The FCA also estimates that relevant customers will probably receive less than £950 in compensation per agreement. It has not set out the basis for this estimate but it will clearly depend, among other things, on the methodology used to calculate redress.

In its recent letter to the FCA, the FSR Committee has raised concerns about the potential costs of the proposed redress scheme and has asked the FCA to provide details of the financial modelling it has undertaken.

Although the purpose of an FCA redress scheme is to remove the need for customers to bring their own claims, a customer within scope could still, in principle, bring a court claim or complain to the FOS. Any redress received in court proceedings would be discounted from compensation payable under the FCA redress scheme and vice versa. 

A customer may also complain to the FOS if they think their case has not been properly dealt with by the firm. A FOS claim would be considered by reference to what the determination under the FCA redress scheme should be or should have been. 

The FCA has confirmed that firms are not currently required to provide a final response to relevant motor finance complaints before 4 December 2025. The FCA will consult on further extending this deadline to align with the timetable for compensation payments under the proposed FCA redress scheme.

The FCA actively oversees FCA redress schemes while they are in operation. This enables the FCA to amend scheme rules where necessary, or to provide general or specific guidance to firms should any issues arise. If a firm fails to comply with the requirements of an FCA redress scheme, the FCA has the power not only to take disciplinary action against the firm, but also to assume direct responsibility for the administration of the scheme or to appoint a third party to manage it on its behalf.

Yes. Compliance with an FCA Redress Scheme will not prevent a firm from potential enforcement action by the FCA in respect of past practices, although effective implementation of a scheme will mitigate the risks of enforcement action. 

The FCA’s approach to enforcement in the British Steel Pension Scheme matter is a good example of this. In addition to implementing an FCA Redress Scheme for relevant pension scheme members, the FCA opened approximately 30 enforcement investigations into firms and individuals regarding defined benefit transfer investment advice.

This will depend on the time period covered by the FCA Redress Scheme as determined by the FCA. The scheme rules will specify a start and end date for cases to be reviewed.

The FCA has confirmed that it will launch its consultation for the FCA redress scheme by early October, and that the consultation will be open for six weeks.

The FCA has said that it aims to finalise the rules such that the scheme can launch in 2026, with customers starting to receive compensation that year.