FCA Motor Finance Consumer Redress Scheme final publication: Key changes and implications for lenders

The revised operational measures are designed to ensure that consumers receive compensation more swiftly, while enabling lenders to implement the scheme with greater efficiency and resilience.

• Implementation period: Unlike the consultation draft, which anticipated the scheme commencing immediately after publication, the FCA has now set out a clear implementation timeline. For cases arising after 1 April 2014, the scheme will take effect from 31 June 2026, while cases predating this will fall under the scheme from 31 August 2026. This provides lenders with additional time to adjust their processes and ensure compliance with the new requirements.
• Customer communication: Lenders are now required to contact only those customers who have lodged complaints before the end of the implementation period, those who fall within the scheme's scope (unless an exception applies), and customers excluded due to civil limitation rules. However, the FCA expects the latter to be invoked sparingly. This targeted approach streamlines communication and helps ensure only eligible customers are engaged.
• Flexible communication channels: Lenders are no longer obliged to use recorded postal delivery for scheme communications. Instead, they may select the most suitable channel for each customer, taking into account Consumer Duty obligations and any vulnerabilities customers may be experiencing. This allows for a more tailored and responsive approach to customer engagement.
• Expedited compensation process: Consumers can now accept the provisional compensation offer immediately, enabling them to proceed to settlement without waiting for a final confirmation letter. This amendment accelerates the compensation process, delivering quicker redress for affected customers.

The FCA has refined the eligibility criteria for the Motor Finance Consumer Redress Scheme, introducing several important updates that lenders must now consider.

• Scheme period: The scheme now operates across two distinct periods to accommodate potential stakeholder challenges regarding the inclusion of pre-2014 cases. These periods are: 6 April 2007 to 31 March 2014, and 1 April 2014 to 1 November 2024. This separation ensures clarity and flexibility in the scheme’s scope.
• High value loans: A new exclusion has been introduced for loans exceeding the value of 99.5% of other loans issued in the same year. Such high-value loans will not be considered within the scheme’s eligible population.
• Small commissions: Cases involving commission amounts below £120 prior to 1 April 2014, and below £150 after this date, are now excluded from the scheme. This update ensures only meaningful commission arrangements are considered.
• Zero APRs: The scheme now explicitly excludes cases with zero percent APRs, recognising that such customers are unlikely to have suffered financial loss. This clarification was previously addressed in the scheme’s FAQs and is now formally incorporated. 
• High commission: The FCA has revised its definition of high commission cases. Previously, cases qualified if commission was 30% of the total charge for credit and 10% of the loan amount. Now, the threshold has increased to 39% of the total charge for credit, while the 10% of loan amount criterion remains unchanged.

The FCA has also revised the compensation calculation methodology, aiming to deliver fairer outcomes for both consumers and lenders. These changes address losses resulting from insufficient disclosure of commission amounts, structures, and commercial relationships.

• APR adjustment remedy: For cases prior to 1 April 2014, the APR adjustment remedy has been increased from 17% to 21%, reflecting differing market conditions. For cases after 1 April 2014, the remedy remains at 17%. The FCA conducted extensive analysis and consulted an independent academic to ensure the appropriateness of this distinction.
• Caps: To prevent overcompensation, the FCA has introduced caps, ensuring customers do not receive more than they would have if treated fairly, or more than those who experienced the greatest unfairness. The caps are as follows:
  1. 90% of commission plus interest.
  2. Total cost of credit, adjusted to the minimal cost available to 5% of the market at the time (excluding zero percent APRs). Cases with APRs below the minimum defined for each year are excluded from calculation.
  3. Actual cost of credit, calculated on a simplified basis.
• Compensatory interest: While the methodology for calculating compensatory interest remains unchanged—Bank of England base rate plus 1%—the FCA has introduced a minimum floor of 3%. This means that penalty interest cannot fall below 3% in any given year, a measure implemented after considering factors such as inflation.

The FCA has provided further clarification on areas that raised stakeholder questions, particularly regarding the inclusion and treatment of certain arrangements.

• Volume bonuses: The FCA has clarified that volume bonuses offered to dealers or brokers are not to be included in the commission calculation.
• Primary vs Secondary brokers: The scheme applies regardless of whether the customer was introduced via a primary or secondary broker. The FCA has clarified the commission calculation method for each scenario, providing much-needed certainty for lenders who use secondary brokers and lack direct dealer relationships.