FCA consultation on motor finance compensation scheme

The FCA's proposed scheme follows the Supreme Court's judgment in Johnson v FirstRand Bank, Wrench v FirstRand Bank, and Hopcraft v Close Brothers, which significantly limited the scope for so-called "secret commission" claims based on fiduciary duty and bribery, but left the door open to claims centred on unfairness within the meaning of section 140A of the Consumer Credit Act 1974. For further details of the Supreme Court's judgment, please see our previous article here. 

Scope of the scheme 

The FCA predicts that 44% of all agreements made since 2007 (around 14.2 million agreements) will be considered eligible for compensation under the proposed scheme, with inadequate disclosure of one or more of the following features giving rise to a presumption of unfairness:

• A discretionary commission arrangement (DCA) (a model now banned by the FCA)
• High commission (where the commission is equal to or greater than 35% of the total cost of credit and 10% of the loan) and/or
• Contractual ties that gave a lender exclusivity or a right of first refusal to provide credit.

The FCA proposes that motor finance complaints about inadequate disclosure of a commission or tie that doesn’t involve one of the three features above would fall outside of the scope of the scheme. 

Challenges

The adoption of a 'presumption' approach does avoid the difficulties that would otherwise arise were lenders required to apply the fact-specific unfair credit relationship test to each and every complaint. The trade-off, however, is that consumers who fall outside of the proposed thresholds (including those with complaints relating to non-DCA agreements, where the other two features are not present) could be left without appropriate redress unless they are willing to pursue a claim in court (which may well prove costly and time consuming and act as a bar accordingly).  

From a lender perspective, while the FCA's proposals enable lenders to rebut the presumption of unfairness in limited circumstances, for example where the lender can evidence that adequate disclosure was in fact given, this is likely to be a practical challenge where records no longer exist for agreements dating as far back as 2007. It is currently unclear whether lenders will be able to rely on evidence of policies and common practice (as has been seen in other instances), as opposed to direct evidence of disclosure specific to each agreement.

The introduction of a compensation scheme will also have big (and direct) implications for claims management firms who act on the basis of alternative funding models, noting that (as proposed) consumers will not need legal representation in order to submit a claim through the scheme (something which the FCA has been keen to emphasise). 

FCA expectations

The FCA has also outlined in its Dear CEO letter the steps that it expects motor finance lenders and brokers to take in preparation for the potential redress scheme and in relation to their existing portfolio of complaints. These steps include:

• Identifying and contacting impacted consumers and gathering information to assess whether cases fall within the scope of the proposed scheme
• Strengthening systems and controls so they can deliver accurate redress at scale once the scheme starts and
• Maintaining adequate resources to meet potential liabilities.

Lenders and brokers who consider themselves unable to meet their obligations (including those that consider they may not have adequate resources to meet their potential liabilities under the scheme) must promptly notify the FCA. 

Next steps

The FCA will close its consultation on the proposed redress scheme on 12 December 2025. If the scheme is introduced, it is expected that the FCA's policy statement and the final rules will be published by early 2026. 

If you would like to discuss the impact of the scheme in more detail (including issues relating to commission arrangements and/or "secret commissions" claims more generally), or would like assistance with submitting a response to the consultation, please get in touch with a member of the Fraud team.