Motor Finance: Can the FCA address the concerns raised by stakeholders and deliver a successful scheme?

The subsequent Supreme Court hearing brought some relief to the lenders involved, as well as to the broader financial services industry. However, one critical issue remained unresolved: the question of unfair relationships. The Financial Conduct Authority’s (FCA) response to this point has sparked widespread concern, not only within the Motor Finance sector but across the wider financial landscape.

At the heart of the issue is the evidentiary threshold for establishing an unfair relationship. Key factors identified by the Supreme Court include:

1. Inadequate disclosures
2. Excessive commission levels relative to the total cost of credit and loan amount
3. Tied arrangements that may limit consumer choice
4. Breaches of regulatory requirements

The consultation period for responding to the FCA’s proposed redress scheme has now closed. Having listened to the various perspectives shared and reviewed the publicly available material, there are several areas where further clarification and practical examples will be needed to ensure the scheme operates effectively and meets its intended objectives

The FCA faces a challenging balance: designing a scheme that is fair to both consumers and lenders, while also ensuring the motor finance market can continue to function efficiently and support consumers in purchasing vehicles. If the scheme is not sufficiently clear, there is a risk of unintended consequences — such as inconsistent outcomes for consumers, an increase in court claims or involvement of claims management companies (CMC), and lenders seeking to recover costs from dealers. Lenders seeking to recover costs from dealers could place additional financial pressure on dealers, potentially undermining the government’s wider growth agenda and its ambition to maintain the UK as a stable and attractive regulatory environment for investment and innovation.

This publication explores the key areas where the FCA may need to provide greater clarity to avoid these risks, and sets out considerations for lenders as they prepare for a range of potential scenarios.

Key areas where the FCA should provide further clarity

There are several operational and substantive aspects of the proposed redress scheme that would benefit from further clarification and consideration by the FCA. Below are some of the areas we consider to be particularly important to the successful delivery of the scheme:

Operational 

There are several considerations and challenges that the FCA will have to address, some of the key ones are:

• Customer contact: The FCA expects lenders to contact all customers using recorded letters to ensure communications reach the correct individuals and to prevent scammers from exploiting the scheme. While the intention is understandable, this approach carries significant cost and may not be operationally feasible — particularly given the volume of letters involved and the capacity constraints of the postal system. The FCA should consider allowing alternative, secure communication channels, such as emails with verified links or directing customers to register through an official firm‑managed portal.
• Effective date: The proposed effective date — the day immediately following publication of the final redress scheme — is ambitious. Lenders are committed to resolving this issue quickly and fairly; however, if the FCA introduces material changes in the final scheme, implementing them immediately may be unrealistic. Many lenders intend to use automation and AI to deliver the scheme efficiently and consistently, but these solutions require extensive testing and validation to ensure they operate as intended. The FCA may therefore need to allow additional time for firms to implement, test, and refine their operational processes before the scheme goes live.
• Compensation: It appears that multiple CMCs may have submitted complaints on behalf of the same clients. This creates complications for lenders in determining who should receive the redress, and it raises questions for customers about how CMC fees will be handled. The FCA will need to provide clarity on this point to prevent further challenges for customers who have already been waiting a long time for a resolution.

Redress methodology and calculation 

The points below highlight key areas of contention for motor finance lenders, where further clarification or refinement from the FCA is expected to help ensure the success of the proposed redress scheme.

• Discretionary Commission Arrangements: The FCA has proposed that all customers whose car finance agreements were subject to discretionary commission (DCA) arrangements should be eligible for compensation. Many motor finance lenders oppose this, as it implies that every affected customer could receive redress, regardless of how competitive their APR may have been at the time. A major challenge for the FCA will be establishing a benchmark for what constitutes a “competitive” rate, given the wide variation in lender pricing, shifting market conditions over the relevant period, and the length of time involved. Lenders are also struggling to gather evidence to support the presumption that dealers always offered the lowest available rate. In his recent appearance before the Treasury Select Committee, Nikhil Rathi noted that the FCA is examining certain anomalies in the data, including cases where customers were charged 0% interest. As a result, this is likely to be a difficult area for the FCA to resolve in a way that is workable and acceptable to all parties.
• Commission definition: A commission arrangement refers to any agreement between a lender and a credit broker, linked to the provision of motor finance, that involves the payment—directly or indirectly—of commission to the broker. The difficulty with this definition is that commission can take many forms, including volume bonuses, documentation fees, and head office commissions. In some cases, a small commission may have been paid under a DCA, while additional payments—such as head office commissions, volume bonuses, or documentation fees—were also made. Some of these elements are straightforward to identify and quantify, whereas others, such as volume bonuses, are far more complex. This raises an important question: should all these commission types be included in the redress calculation? The FCA is expected to clarify the scope of the definition and provide examples of which commission types will be included, as well as guidance on how they should be calculated.
• Tied arrangements: This point has taken many finance providers—particularly those that operate as the finance arm of a car manufacturer—by surprise. It is widely understood that most new car finance is provided by these “captive” lenders because manufacturers subsidise sales through low interest rates, deposit contributions, and other incentives designed to support vehicle purchases. The challenge for these lenders is demonstrating that customers were aware of the relationship between the dealer, the manufacturer, and the manufacturer’s finance arm. The implications are significant. In his recent appearance before the Treasury Select Committee, Nikhil Rathi also noted that the FCA has been reviewing evidence submitted by captive lenders, some of whom have provided detailed material suggesting that the nature of the relationship was disclosed to customers. He confirmed that this is an area the FCA will consider carefully. The FCA is expected to clarify—if not refine—the rules to ensure that only customers genuinely affected by tied arrangements fall within the scope of the proposed scheme. This may include providing examples of the types of evidence lenders must produce to demonstrate that customers were aware of the captive relationship. Such clarification would help distinguish these cases from situations like the one considered by the Supreme Court involving used car finance, where the customer was unaware of any tied relationship and reasonably expected the dealer to source a competitive offer from a panel of independent lenders.

What should lenders do now until the FCA announces the proposed redress scheme?

We have highlighted in previous articles the “no‑regret” activities that motor finance lenders can begin now to prepare for the proposed redress scheme. A few key areas that are worth reiterating include:

• Operational organisation: Establish the core structure of the programme to ensure lenders are positioned to deliver the redress scheme effectively. This framework should be flexible enough to adapt as the FCA finalises the scheme and introduces any required changes.
• Data and databases: Identify, gather, and validate the data currently considered essential for delivering the scheme, while maintaining the ability to incorporate additional data points that may be required once the FCA publishes the final rules.
• Assurance: To meet regulatory requirements, firms should consider engaging independent parties with the necessary expertise and industry knowledge to review key aspects of their remediation exercise. This approach will not only help ensure compliance but also support more effective interactions with the FCA. Additionally, it may influence the scope of FCA reviews by demonstrating that the firm has properly implemented and executed the required redress methodology and customer engagement strategy.
• Engagement with the FCA: Over the coming months, the FCA may seek clarification on points raised in lenders’ submissions. It is important for lenders to engage constructively and provide the necessary support so the FCA can refine and finalise the scheme with the benefit of accurate and comprehensive information.