FCA chief tells lenders to stop “haggling” over redress scheme

The head of the UK’s financial regulator has issued a stern warning to banks and motor finance lenders, urging them to stop “haggling” over compensation for millions of customers potentially mis-sold car finance, and to instead work swiftly towards a fair redress scheme.

Speaking to the Financial Times, Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA), said lenders must accept responsibility and cooperate with the regulator to resolve what could become one of the largest compensation exercises in UK financial history, with estimated costs ranging from £9 billion to £18 billion.

The comments come just days after the Supreme Court ruled that car dealers did not owe a fiduciary duty to customers, easing fears of catastrophic compensation payouts across the banking sector. However, the court upheld a key part of a case involving “unfair treatment,” where a consumer was charged excessive interest due to a poorly disclosed commission arrangement.

At the heart of the issue is the widespread use of discretionary commission arrangements (DCAs), in which dealerships earned more money by inflating the interest rate on customer loans – a practice banned by the FCA in 2021. Despite the ban, Rathi noted that many such agreements were already in breach of pre-existing disclosure rules.

Following the judgment, the FCA launched a consultation on an industry-wide redress scheme for customers “treated unfairly” by such arrangements. The scheme could see eligible consumers compensated for loans dating as far back as 2007, a move lenders say could prove operationally difficult due to a lack of historical records.

“We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information, and the evidence base will be patchy at best. We will be interested to see how the FCA addresses this point in its consultation.”

But Rathi was unmoved. “I don’t think it is completely impractical, as I heard one of the trade associations say. We know it is difficult,” he said. “If industry works with us, then we can get this moving quickly.”

He warned that if lenders choose to contest the issue in court, the process could drag on for years, prolonging uncertainty and potentially damaging trust in the sector further. “We hope that is not where we are going to be,” he added.

Rathi also revealed that the regulator is still weighing whether the scheme should be opt-in – where customers would need to apply – or opt-out, which would involve firms proactively contacting affected consumers unless they decline the offer. Each approach carries trade-offs between speed and coverage.

“An opt-out scheme might take longer because firms have to go and look for all the addresses and go and track down customers who may have moved,” he explained. “An opt-in scheme may be quicker, but will be less comprehensive.”

Most customers are expected to receive under £950 per loan agreement, but the cumulative bill for lenders could be enormous. Shares in major car finance providers, including Lloyds Banking Group and Close Brothers, rose following the Supreme Court ruling, which removed the threat of even larger liabilities, previously feared to reach up to £44 billion.

Rathi, who was recently reappointed for a second five-year term as FCA chief, said he hoped the car finance scandal would mark the end of mass redress events in the UK’s financial sector, echoing Chancellor Rachel Reeves’ pledge to overhaul the consumer complaints system and restore public trust in financial services.

“This is the only significant redress issue we have on our radar,” Rathi said. “If we can get this sorted speedily and expeditiously, we hope that can give everybody confidence for the future.”

The FCA’s consultation on the redress scheme is ongoing, with the final decision expected later this year. If implemented as planned, the first consumer payouts could begin in 2026.