Financial Regulator to Discuss Compensation Plan for Car Loans after Supreme Court Decision
The Financial Conduct Authority (FCA) has announced plans to consult on an industry-wide redress scheme for motor finance customers, following a landmark Supreme Court ruling that clarified when motor finance agreements could be deemed unfair.
The proposed scheme aims to compensate customers who were treated unfairly, particularly where firms failed to comply with disclosure rules or acted unlawfully regarding commission payments.
Key points of the FCA's proposed redress scheme include:
- The scheme will be industry-wide, free-to-access, and focused on fairness, timeliness, and ease of participation, without the need for customers to use claims management companies or law firms (which would reduce compensation by charging fees).
- The redress scheme will establish clear rules on how claims are assessed and calculated, focusing on non-disclosure of relevant information and the interplay of factors identified by the Supreme Court.
- The Supreme Court judgment outlined key factors that may indicate an unfair relationship under the Consumer Credit Act (CCA), such as the size of the commission relative to the credit charge, whether the commission was discretionary, characteristics of the consumer, compliance with regulatory rules in place when the loan was sold, and the extent and manner of disclosure to the customer.
- The FCA will consult on the proposed scheme broadly, considering fairness to consumers who lost out and preserving the integrity of the motor finance market for the future.
- Firms are currently not required to provide a final response to motor finance complaints until 4 December 2025, and the FCA expects to publish the consultation by early October 2025, with compensation payments starting next year.
- Law firms and claims management companies are required to inform clients about the existence or likely prospect of a redress scheme before signing agreements and must ensure fees charged are fair and reasonable.
The FCA's proposed motor finance redress scheme will compensate customers who suffered from undisclosed or unfair commissions linked to their car finance agreements, with eligibility depending on factors such as commission size, disclosure, and consumer characteristics. The FCA aims for a prompt consultation and implementation to compensate consumers efficiently and fairly.
In addition, the FCA will consult on which non-discretionary commission arrangements should be included in the scheme. The FCA noted that non-disclosure of other facts relating to commission can make the relationship unfair.
Since the Court of Appeal's ruling, several firms have left the motor finance market. The FCA has not mentioned any prior context or the Chancellor Rachel Reeves exploring routes to overturn the Supreme Court ruling. The FCA aims to finalize fresh rules for the redress scheme to launch by 2026.
Several financial institutions, including Santander, Lloyds Banking Group, Barclays, and Secure Trust Bank, have set aside provisions for the car mis-selling scandal, with amounts ranging from £90m to £1.2bn. Secure Trust Bank plans to phase out its motor finance business' loan book.
The FCA aims to publish a consultation by early October, and consumers may begin receiving compensation from the redress scheme next year. The redress scheme will cover agreements dating back to 2007, and the total costs of the redress are expected to be between £9bn and £18bn. The FCA is also considering an "opt-in or opt-out" process for the redress scheme.
- The FCA's proposed motor finance redress scheme will address unfair commission practices in the banking and automotive industries, with a focus on car finance agreements.
- The redress scheme will also take into account non-discretionary commission arrangements and other factors that may contribute to an unfair relationship, as outlined in the Supreme Court's ruling.
- With the redress scheme expected to launch by 2026, the total costs are projected to be between £9bn and £18bn, potentially impacting several major financial institutions, such as Santander, Lloyds Banking Group, Barclays, and Secure Trust Bank.
