FCA’s motor finance redress scheme: what firms need to know now

Introduction

On 5 June 2025, the Financial Conduct Authority (FCA) published a statement outlining its key considerations for implementing a potential redress scheme for motor finance customers who may have suffered historic detriment through the commission arrangement used by their finance provider.

Motor finance commission payments have been under the spotlight for some years now. In October 2024, the Court of Appeal held that, among other things, a commission payment from a finance company to a motor dealer, where the consumer was given insufficient information about this arrangement, was unlawful. The Court of Appeal also controversially held that in certain circumstances, a motor dealer acting as broker owed both a disinterested and a fiduciary duty to consumers. The judgment was appealed to the Supreme Court, which heard the appeal in April, and is due to hand down its judgment in July.

As well as the large number of cases going through the courts, which were all stayed pending the outcome of the Supreme Court case, there have also been a large number of complaints to the Financial Ombudsman Service (FOS). In December 2024, the High Court ruled in favour of the FOS in a judicial review brought by Clydesdale Financial Services Ltd.

The FCA has been separately looking into discretionary commission arrangements, which it banned in 2021, and has paused its complaint-handling requirements for all motor finance complaints relating to commissions until after the Supreme Court judgment.

The FCA is minded to introduce a redress scheme, which its predecessor body decided against doing for the last mass redress event involving payment protection insurance. The FCA is keen to ensure that any redress exercise is undertaken as soon as possible after the judgment is published, so has published this statement in advance to start canvassing industry views.

Background

The Supreme Court Case

The Supreme Court is currently considering appeals in Johnson v FirstRand Bank Ltd (t/a Motonovo Finance) and ors [2024] EWCA Civ 1282, which centre on whether car dealers owed a fiduciary and/or disinterested duty to customers when arranging motor finance, and whether lenders are liable for a breach of such a duty. The Supreme Court is also considering arguments relating to unfair relationships under the Consumer Credit Act 1974.

Discretionary Commission Arrangements

The FCA estimates around 2 million customers a year buy a car using a finance agreement, and the market is worth at least £80bn.

Car dealers have traditionally acted as credit brokers for finance firms, and have often received a commission for arranging finance for a customer. Under a discretionary commission arrangement (DCA), a car dealer would be given a range of interest rates by their finance provider(s), and the higher the interest rate, the higher the commission. This arrangement was often not communicated to the consumer.

In 2019 the FCA launched a review of the motor finance industry, and in 2021 the FCA prohibited DCAs. The FCA also made some minor changes to its commission disclosure requirements in the relevant chapter of its handbook, CONC 4.5.

Large numbers of consumers continue to bring claims against car dealers and finance companies regarding these DCAs.

Due to the significant volume of complaints regarding DCAs, and the inconsistent way in which the FOS and County Court were dealing with them, in January 2024 the FCA announced that it would conduct its own review of past commission practices (not just DCAs) and paused the time limit for firms to respond to these complaints while it carries out the review, which has since been extended.

The FOS recently reported that complaints relating to motor finance had partly led to a huge rise of new complaints. There were 73,328 complaints for 2024/25 relating to motor finance, compared to 12,604 for the previous period.

FCA’s Powers under Section 404 FSMA

Under section 404 of the Financial Services and Markets Act 2000 (FSMA), the FCA has the power to establish a consumer redress scheme where it considers that firms have breached regulatory requirements and that consumers have suffered loss as a result. Under a redress scheme firms can be required to identify affected customers and provide appropriate redress, without the need for individual complaints to be made.

The FCA’s potential redress scheme

The FCA’s 5 June statement sets out a clear framework for how a redress scheme might operate:

• Timing: The FCA will confirm whether it will proceed with a redress scheme within six weeks of the Supreme Court’s decision. If it decides to go ahead, it may run a shorter consultation on the proposed scheme. It is unlikely that the scheme will be operational before 2026.
• Opt-in or opt-out: If implemented, under an opt-out redress scheme firms would be required to proactively identify affected customers and offer compensation. Under an opt-in scheme, customers would need to contact their provider and confirm they wished to be included. The FCA will need to balance the interests of consumers and the market more widely when deciding which type of scheme to implement.
• Principles: The FCA intends to be guided by certain principles when designing their proposed redress scheme, including simplicity, timeliness, transparency and market integrity.

Implications for the motor finance industry

If the redress scheme proceeds, the operational and financial implications for motor finance firms may be significant:

• Retrospective exposure: Firms may be required to compensate customers for agreements dating back many years. Some analysts have estimated that the total cost of redress may exceed the £38bn cost of PPI redress.
• Data and record-keeping: Firms may not have past customer records, and the relevant commission arrangement, available in an easily accessible format.
• Financial planning: Firms should have already begun assessing potential redress liabilities and consider provisioning for compensation costs in their financial statements.

Conclusion

Firms should consider the FCA’s potential redress scheme and how it may impact them, in particular by ensuring that their records are in good order. We will provide a further briefing once the Supreme Court has handed down its judgment.

Many thanks to Elisheva Joshua, current trainee in the team, for her help preparing this article.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2025