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.

The FCA has already made clear that one benefit of an FCA Redress Scheme is that it is designed to be user friendly such that fewer customers need to rely on claims management companies (CMCs) (meaning that they keep all of any compensation they receive). The FCA has warned motor finance customers that by signing up now with a CMC or law firm, they may end up paying for a service they do not need and having to pay up to 30% in fees out of any award they may receive. In addition to being simpler and easier for consumers to navigate, an FCA Redress Scheme also 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).

Yes – on two previous occasions. The first (in 2013) related to unsuitable advice to invest in the CF Arch Cru Investment and Diversified Funds. The second (in 2022) related to members of the British Steel Pension Scheme.

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).

The Supreme Court case relates to both discretionary and non-discretionary commission arrangements, meaning that a range of outcomes is possible for different customer scenarios. Therefore, even if the appeal by the motor finance providers succeeds on certain grounds there may still be scope for the FCA to determine that customers have suffered detriment for which a legal remedy would be available and that an FCA Redress Scheme is necessary. This is particularly the case as the FCA was already reviewing firms’ historic use of discretionary commission arrangements before the CofA decision last year and was contemplating the need for an FCA Redress Scheme. 

Under an FCA Redress Scheme, the onus is placed on firms to: 

• investigate whether they have failed to comply with relevant regulatory requirements;
• determine if that failure caused loss or damage to consumers; and 
• determine what the redress should be in respect of the failure and make the redress to the consumers. 

Whilst firms themselves are responsible for determining whether customers have suffered detriment due to firms’ conduct, they must follow the FCA’s rules establishing a framework for the relevant FCA Redress Scheme. 

Just because a firm is within the scope of an FCA Redress Scheme does not automatically mean every customer of that firm will receive redress. Firms have to investigate each individual case within the framework set out by the FCA and decide if the customer has suffered loss or damage and should be compensated.

The extent to which the firm has to investigate and potentially pay compensation will depend on the scope of the particular FCA Redress Scheme in effect. 

The FCA has broad discretion to set the parameters of any redress scheme. The FCA could, for example, design the scheme so firms have to: (i) review all cases falling with a relevant time period unless customers opt-out; (ii) ask consumer if they want to opt-in; (iii) advertise the scheme and only investigate consumers that opt-in; or (iv) advertise the scheme via the FCA and only investigate consumers that opt-in.

For motor finance, the FCA’s Redress Principles include the following considerations which the FCA will take account of when designing an FCA Redress Scheme.

1. Comprehensiveness: the scheme should cover as wide a range of complaints as possible so consumers don’t have to go elsewhere, like court;
2. Fairness: the scheme should ensure the approaches to determining breaches and calculating redress are fair to consumers and firms;
3. Certainty: the scheme should give consumers and firms finality;
4. Simplicity and cost effectiveness: the scheme should make it easy for consumers to participate in and the cost of delivering the scheme should be proportionate for firms;
5. Timeliness: the scheme should resolve the majority of claims within a reasonable timeframe;
6. Transparency: consumers should receive clear explanations of decisions and data highlighting the progress of the scheme should be publicly available to provide confidence; and
7. Market integrity: the scheme should support the ongoing, long-term availability of high quality, competitively-priced motor finance in the UK. 

On quantum, and in alignment with the Government’s growth agenda, the FCA has made clear that a scheme should not, by itself, cause firms to exit the market or go out of business. The FCA has acknowledged the speculative range of redress rates suggested (such as those based on FOS decisions) but has made clear that it may take a different approach to calculating redress if it goes ahead with an FCA Redress Scheme. 

The FCA has highlighted the following potential risks of firms failing as a result of an FCA Redress Scheme: 

• the risk of reducing competition and making it more expensive for consumers to borrow money to buy a car in the future; and
• the risk that where firms fail, consumers may not get any redress, as motor finance is not covered by the Financial Services Compensation Scheme.

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 monitors FCA Redress Schemes whilst they are running so that they can amend the scheme rules if necessary or give general or individual guidance to firms whenever issues arise. Where a firm does not comply with an FCA Redress Scheme, as well as taking disciplinary action against a firm, the FCA can take over the conduct of the scheme itself or appoint a third party to do so.

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 stated that it will confirm within six weeks of the Supreme Court judgment whether it is proposing to introduce an FCA Redress Scheme and, if so, it will set out timings for when it will issue a consultation. 

The FCA has said it wants to be able to act as quickly as possible once the Supreme Court has made its judgment and is already engaging with stakeholders so that if it goes ahead with an FCA Redress Scheme, it may have a shorter than normal consultation window (for example, six weeks). Following the consultation, the FCA will confirm whether it is going ahead with an FCA Redress Scheme, and if so, what the final rules are. 

The FCA has said that if it proceeds with a scheme, it expects that firms would, subject to consultation, need to implement the scheme in 2026.