FCA shocks industry with potential £13.5bn compensation scheme

Hundreds of thousands of motor finance customers could be in line for compensation after the Financial Conduct Authority (FCA) today announced plans to consult on a redress scheme for consumers who bought finance without disclosing of commission.

The expedited announcement about the proposed compensation scheme follows the Supreme Court judgment relating to motor finance on Friday evening which rejected a view that dealer/brokers owe a fiduciary duty to their customers in two cases, but opened the door in a third case, upholding a claim that the relationship between Johnson and a finance company was “unfair” under the Consumer Credit Act 1974.

In a statement, Nikhil Rathi, chief executive of the FCA, said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated.

We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.”

The FCA plans to publish a formal consultation by early October, with the aim of launching the scheme in 2026. Consumers could start receiving payments next year.

The FCA have claimed that the scheme is designed to be “fair and easy to participate in,” with the FCA urging people not to use claims management companies or law firms, which could take up to 30% of any payout in fees.

Dissent

Critics of the move by the FCA, which appears to be an opt-out arrangement for consumers seem likely to focus on the gap between what the Supreme Court has ruled and the FCA’s approach.

The Supreme Court argued that unfair relationships are highly case-specific and require a consideration of a range of factors including the sophistication of the customer, the nature of the relationship between lender and dealer and the size of the commission that was paid.

This latest move by the FCA will be a blow to the finance industry who had taken comfort from the Supreme Court judgment and had expected a more limited opt-out redress scheme focused on cases where finance involved discretionary commission arrangements.

The FCA’s decision may be seen by some to reduce the likelihood of a judicial review brought by CMCs against the FCA itself; and to broadly reflect the sentiments expressed by the national media who had largely portrayed the Supreme Court decision as bad news for consumers.

David Bowden, Barrister at Erimus Chambers commented. “There will be a judicial review of course. The FCA has stated: “We think the scheme should cover agreements dating back to 2007, to be consistent with the complaints the Financial Ombudsman can consider and to ensure the scheme is comprehensive”, However car dealers only became FCA regulated in April 2014 – so that is regulatory over-reach. There is 6 year limitation period to bring a court claim – so that rules anything out after August 2019. The FCA has also not read the Hopcraft judgement or s140A of the CCA – there has to be a consideration/balancing of the rights of all 3 parties. Unlike PPI there was no market failure. No customer has complained they were given a bad deal – so if there is to be tinkering with the commission, then the amount of interest/APR has to be looked at as well.”

Stephen Haddrill, Director General of the FLA said: “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.”

Paul Hollick, chair of the Association of Fleet Professionals, said: “We’ve gone from a situation on Friday where the Supreme Court verdicts suggested the worst risks for the motor finance sector had been removed, to one on Monday morning where the FCA’s intervention has reintroduced the possibility of quite widespread reparations. It means we’re going to remain in a situation of considerable uncertainty until the redress scheme is finalised in October.

“The risks for the fleet industry here are twofold. If banks and motor finance companies are forced to pay billions in compensation to consumers, it’ll potentially have a knock-on effect on the availability and cost of finance to fleets. Also, if it becomes more difficult for used car buyers to access finance, it means there could be an impact on residual values, which is also bad news for fleets.

“We’d like to see the whole situation resolved as soon as possible. Yes, consumers whose legal rights have been ignored should be recompensed fairly but the motor finance market also needs to return to normal functioning as soon as possible.”

Estimated costs and consumer impact

While no final decision has yet been made, the FCA estimates that most individuals will receive less than £950 in compensation. The total cost to the motor finance industry is expected to be between £9 billion and £18 billion, depending on the final scope and design of the scheme. Analysts suggest a midpoint figure is the most plausible.

The FCA stressed that redress would depend on specific circumstances, and not all consumers will be eligible. The scheme is expected to apply to finance agreements dating back to 2007, ensuring broad coverage and alignment with the Financial Ombudsman’s remit.

The regulator acknowledged the potential market impact but maintained confidence that a functioning car finance market would continue. Firms have been instructed to review their financial provisions for potential liabilities and ensure they comply with all regulatory requirements.

Next steps

The FCA plans to publish the consultation by early October, keep it open for six weeks, finalise rules by early 2026, and begin consumer compensation payouts later that year.

“It will take time to establish a scheme, but we hope to start getting people any money they are owed next year.”

AFC looks forward to working with Shoosmiths and lenders to provide their feedback on the workability of the FCA’s latest plan, during the consultation period.

AFC/Shoosmiths webcast

Don’t miss your chance to join the AFC/Shoosmiths webcast, sponsored by Odessa, for the first in-depth and independent analysis of the Supreme Court’s landmark ruling on commission disclosure in auto finance.

The 90-minute session begins at 9am on Monday 4^th August and will feature expert insight from leading industry figures and legal professionals. Stay informed with a forensic breakdown of the judgment, its implications for compliance and redress, and what the industry should expect next. Secure your place now by registering here.