The FCA announcement on a motor finance compensation scheme

On 3 August 2024, following the Supreme Court judgment in relation to motor finance claims which was handed down on 1 August 2025 and can be read about in more detail here, the Financial Conduct Authority (“FCA”) confirmed that (as widely anticipated) it would consult the industry on a proposed motor finance compensation scheme because it said that it wants to provide clarity and certainty to consumers, firms and investors as quickly as possible.

The regulator also said that it wants to ensure the integrity of the motor finance market so it works well for consumers now and in the future (“these are competitive markets and we’ll make sure that with anything we propose, continues to ensure that happens”). The compensation scheme will apparently look to balance principles including fairness, timeliness, and certainty.

Nikhil Rathi, chief executive of the FCA, commented:

'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.

'Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get.

By October 2025 the FCA will propose rules on how motor finance lenders should consistently, efficiently and fairly decide whether someone is owed compensation and, if so, how much. It will monitor if firms are following the rules and act if they’re not. It is not clear at this stage whether any scheme will be in opt in or opt out for consumers. 

The FCA currently estimates that most individuals will probably receive less than £950 in compensation per motor finance agreement. That is of course significantly less than sums promised by some claims management companies (“CMCs”) and law firms who had been advertising widely in recent months in order to build portfolios of consumers to bring mass motor finances claims in Court or to the Financial Ombudsman Service (similar to what we saw with Payment Protection Insurance (“PPI”) mis-selling).

The final total cost of any compensation scheme will depend on the scheme’s final design. 

The FCA thinks it unlikely the cost of the scheme, including to run it, would be much lower than £9 billion. And it could be higher, up to £18 billion, in some scenarios though the FCA does not believe these are the most likely. A total cost midway in the range, as forecast by some analysts, is more plausible. 

The FCA will launch the consultation by early October, and it will run for 6 weeks; if the compensation scheme goes ahead, the first payments should be made to customers in 2026.

FCA analyst briefing 

Within hours of announcing the compensation scheme, the FCA held a market analyst briefing to provide greater clarity on the proposed redress scheme in advance of the financial markets opening on Monday 4 August 2024. 

The headlines from the briefing are as follows:

• The FCA is going to consult on a scheme that goes back to car finance agreements dating from 2007 as it wants to try and provide a scheme that is as comprehensive as possible. The FCA recognises the potential time bar issues arising under the statute of limitations that are in play with such timelines and said that the redress scheme will not capture claims that would be “timed out” in Court. However, it notes that many cases that are older than 6 years will still be “in time” if the nature of the commission arrangements between lender and dealer were not known to the complainant at the time that the finance agreement was entered into.
• The shape of the redress scheme is within the FCA’s own gift, it is an independent decision for the regulator although it will consult with the industry and with Government. However, the FCA is clear that the details of the scheme and the choices that it is going to frame in the consultation do not require government approval. 
• Approximately 2 million customers a year rely on motor finance in the UK with lending of around £40 billion. Between 2007 and 2020 there were 25.9 million motor finance agreements of which 14.6 million operated with a discretionary commission arrangement (“DCA”) – these were banned by the FCA in 2021 – with around £8.1 billion estimated commission paid in the period.
• The FCA’s redress methodology will look carefully at what the Supreme Court said but will also consider alternatives which could  be lower than the remedy determined by the Supreme Court in Johnson (“and in doing that we’ll think about the degree of harm to the consumer, the different criteria around fairness and of course the market impact”)
• On non DCAs and remedies, the FCA will differentiate and consider non DCAs in the light of the Supreme Court judgment and focus on consumer harm and market impact. The FCA does not see any redress amount been above commission plus interest. However, it is not ruling out a different approach to remedy for DCA and non-DCA agreements.
• The FCA will not seek to retrospectively apply its rules since 2021 to situations before 2021 in any redress scheme. The way the regulator thinks about remedies is that the laws and rules that were in place at that time apply and the retrospectivity argument is unconvincing.
• The FCA expects lenders to engage with customers and make good efforts to contact them . However, there is also a significant role for brokers to pay in the redress scheme because a lot of information that lenders might need to assess a claim will be with them and it is very important that the brokers pay their part in the smooth operation of the scheme. 
• The FCA reiterated its clear and often repeated message for customers to avoid CMCs, supported by consumer champions such as Money Saving Expert Martin Lewis, that they don’t need to use them and that the CMCs would take up to 30% of the compensation. Any redress scheme put in place by the regulator will be free for consumers to use. 
• The FCA, together with the SRA, is actively looking at exit charges levied by some CMCs. It has been reported in the press that some consumers may face fee of £175 per hour for withdrawing claims from CMCs and that such charges are buried away in the small print whereas “no win no fee” is the headline.