Financial Conduct Authority’s Redress Scheme: Strengthening Consumer Protection in the UK Motor Finance Market
On 7 October 2025 the Financial Conduct Authority (“FCA”) published its proposed redress scheme (“the Redress Scheme”) to tackle unfair practices in the motor finance industry; this article examines the details, implications, and next steps for consumers and the motor finance industry.
The necessity for the Redress Scheme follows the Supreme Court delivering one of the most eagerly awaited commercial judgments of recent years on 1 August 2025, where conjoined cases considered the position for consumers who purchased cars on finance from dealers where the dealers received significant commission from the lenders of which the consumers were not aware.
The car finance cases were discussed in more detail in this article that we produced earlier in the summer, and the FCA has now released details of the Redress Scheme.
The FCA’s proposal marks one of the largest compensation schemes in British financial history, with far-reaching consequences for consumers and businesses alike.
The Proposed Redress Scheme
The Redress Scheme potentially affects 14 million car finance contracts.
These agreements, issued between 6 April 2007 and 1 November 2024, often involved undisclosed commission arrangements between lenders and brokers (typically car dealers), which led to consumers paying more than necessary in repaying their loans.
The FCA estimates an average payout of £700 per agreement, less than the amount that the FCA originally signalled back in the Summer (around £950) and significantly less than consumers may have hoped for, with total compensation reaching circa £8.2 billion.
The Redress Scheme aims to provide fair, fast, and accessible compensation without the need for legal action. It is designed to be free for consumers and cost-effective for firms, with the intention being the avoidance of high legal costs and delays often associated with court cases or complaints to the Financial Ombudsman Service.
The FCA considers this to be the most efficient way to resolve widespread misconduct and restore trust in the motor finance market and it hopes that it will come into effect in 2026.
Research commissioned by the FCA revealed that 46% of consumers aware of potential compensation hadn’t claimed due to uncertainty about eligibility, and 24% were unsure about the amount they might receive. However, 81% said a formal scheme would encourage them to claim.
In announcing the Redress Scheme Nikhil Rathi, the FCA Chief Executive, stated “many motor finance lenders did not comply with the law or the rules. Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.”
The FCA says that consumers who believe they were misled, particularly about commission payments, should complain to their lender now.
Those who have already complained will be prioritised once the Redress Scheme launches.
Lenders will contact these individuals and, if no response is received within a month, will proceed to review the case.
Borrowers who haven’t yet complained will be contacted within six months of the Redress Scheme’s start and given six months to opt in.
If a lender cannot trace a borrower, the individual will have one year from the Redress Scheme’s commencement to make a claim directly.
Importantly, the FCA commissioned research demonstrated 41% of eligible consumers are unaware they can submit claims without using a law firm or claims management company (“CMC”).
The FCA is keen to stress that people do not need to use a CMC or law firm to get access to the Redress Scheme. Earlier this week, the FCA, Solicitors Regulation Authority, Information Commissioner’s Office and the Advertising Standards Authority announced that they were joining forces to tackle misleading advertising and inadequate information provided by some CMCs and law firms working on motor finance claims, and the risk that excessive fees are charged to clients and the FCA has already acted to take down more than 700 adverts that had sprung up from those hoping to make money from people seeking compensation
In their announcement of the Redress Scheme, the FCA warns that using such services could significantly reduce the compensation received.
Compensation
Compensation will be awarded if consumers were not informed about one or more of the following:
- Discretionary commission arrangements allowing brokers to adjust interest rates for higher commissions.
- High commission arrangements, such as 35% of the total credit cost or 10% of the loan.
- Exclusive contractual ties between lenders and brokers.
In rare cases, lenders may argue that non-disclosure did not result in unfairness.
However, if evidence is lacking, lenders must assume inadequate disclosure occurred.
The FCA will monitor compliance and take action if firms fail to follow the Redress Scheme’s rules.
Disputes can be escalated to the Financial Ombudsman Service.
Consumers may opt out of the Redress Scheme and pursue court action, but this route is likely to be riskier, slower, and may result in lower compensation after deduction of legal fees.
The FCA will also run an awareness campaign to ensure consumers understand their rights and options as it tries to drive consumers away from lawyers and CMCs who will take a slice of compensation recovered by consumers under the Redress Scheme.
The consultation on the proposed Redress Scheme closes on 18 November 2025.
If the FCA introduces a Redress Scheme (which is highly likely), it expects to publish its policy statement and final rules by early 2026. This timetable depends on the feedback the regulator receives and firms and other parties working constructively together and with the FCA. The Redress Scheme would launch at the same time, with consumers starting to receive compensation later in 2026.
Comment
Garon Anthony, Financial Disputes Partner, comments:
“The FCA’s proposed Redress Scheme represents a major step towards addressing past unfairness in the UK’s motor finance market.
“Inevitably not everyone will be happy with the Redress Scheme, but the initiative underscores the regulator’s commitment to consumer protection and financial fairness particularly in light of the commitment to make the Redress Scheme accessible to consumers without resort to additional legal costs which might have previously made taking action prohibitive. It is noteworthy that many of the early moans about the Scheme have come from those law firms and CMCs hoping to turn motor finance claims into the new PPI.
“Such positive action from the FCA is likely to shape the landscape of car loans and financial regulation for years to come.”
