FCA Motor Finance Redress Scheme: what motor industry firms need to know

The Financial Conduct Authority (“FCA”) confirmed the final design of its long‑anticipated Motor Finance Consumer Redress Scheme, a mandatory, industry‑wide scheme intended to address historic disclosure failings in motor finance agreements. These failings, in the FCA’s view, frequently created an “unfair relationship” under section 140A of the Consumer Credit Act 1974. The scheme represents one of the most significant regulatory interventions the motor finance sector has faced, with an estimated £7.5bn of redress expected to be paid to consumers. For lenders, brokers, dealers and other motor market participants, the scheme introduces a structured framework for identifying affected agreements, assessing liability and calculating redress, with prescriptive timelines and regulatory oversight. 

What are the key aspects of the scheme and what has changed?

• In an attempt to mitigate the impact of any legal challenge as to the FCA’s powers to impose a redress scheme in respect of more historic agreements (on the basis that the FCA only took on supervision of consumer credit from 1 April 2014), the FCA has sought to split the redress framework into two parallel schemes. Both schemes allow consumers who have already raised a complaint and those who have not to seek redress:
  • Scheme 1:  Agreements entered into between 6 April 2007 and 31 March 2014.
  • Scheme 2: Agreements entered into between 1 April 2014 and 1 November 2024. 
    
    The FCA’s hope is that if a challenge to the redress scheme applying to pre-2014 agreements does arise, it will not prevent the post-2014 scheme from continuing.
     
• The scope of agreements in scope has mostly remained the same, but with some limited concessions for edge-cases in the industry, such as those deemed inappropriate for this mass-market scheme. The types of agreement remaining in-scope of the scheme have been confirmed as being:

1. Discretionary Commission Arrangements (“DCA”): Where brokers were able to influence the interest rate or other key pricing terms in order to increase or reduce their commission.
2. High commission arrangements: Where commission met both of the following revised thresholds: 
   • at least 39% of the total cost of credit, and
   • at least 10% of the loan amount financed.
3. Tied arrangements: Where brokers were restricted to offering finance from a particular lender, including rights of first refusal or equivalent rights of priority. 

• The FCA has introduced certain concessions to the scheme:
  • Commission below a de minimis threshold (£120 for Scheme 1 and £150 for Scheme 2) is to be treated as incapable of giving rise to unfairness. Similarly, zero-APR agreements are deemed to be inherently fair, given the unlikelihood of a better deal being available.
  • Loan values higher than 99.5% of other loans (rounded to the nearest £1,000) of a specific year are out of scope of the scheme. This is on the basis that luxury vehicle transactions should fall outside a scheme designed for the mass consumer market. They can still be subject to complaints/FOS jurisdiction - the FCA recognises that customers impacted by this exclusion may look to raise such complaints if they consider themselves to unfairly or illogically fall on the wrong side of the line, but the redress scheme approach is not binding on how these are resolved.
  • Certain captive and white‑label lender arrangements with franchised dealers are excluded where prominent information like branding and trading names made the commercial relationship between the dealer and the firm apparent to consumers.

• Where redress is payable, the FCA has decided to maintain the redress calculation approach from its consultation, stating:
  • For cases involving an undisclosed contractual tie and/or DCA, and commission of at least 50% of the total cost of credit and 22.5% of the loan consumers will receive redress of the commission paid plus interest. 
  • For all other cases, consumers will receive redress of the average of estimated loss and the commission paid, plus interest (known as ‘the hybrid remedy’). The FCA has tweaked its estimates of losses approach based on industry feedback.

The FCA has allowed for certain caps on the hybrid remedy amounts, with a view to addressing industry concerns of compensating individuals more than if they had been treated fairly in the first instance or more than those who suffered the most unfairness. However, the most significant cases will not have such a cap and, in both cases, interest will be based on BoE rates plus one percent but at a 3% floor – therefore the overall effect may be limited.

The various changes to operational steps in the final rules mean that the FCA’s estimated costs of administering the schemes are expected to reduce from £2.8bn in the consultation, to £1.6bn. The FCA’s estimated costs of redress are also down from £8.2bn in the consultation, to £7.5bn. However, importantly, in both cases these estimated reductions in costs are heavily influenced by the FCA assuming an 85% uptake rate in the consultation but only a 75% uptake rate in the final policy statement.

What next?

It is estimated that approximately 12.1 million agreements remain eligible across both schemes. The scheme is intended to firm‑led but tightly controlled given these circumstances. 

The schemes could be subject to a legal challenge from either lender-side or consumer groups (or both). Any legal challenge could lead to one or both schemes being delayed pending that challenge being determined.

If there is no legal challenge to the schemes, firms are being given an implementation period of up to five months for Scheme 1 (meaning the implementation ends 31 August 2026) or three months for Scheme 2 (period ends 30 June 2026) to prepare systems and governance for resolving customer redress payments. 

Following these dates, lenders will be subject to strict timeframes on making determinations for consumers who have, or are deemed to have been, opted in to the relevant scheme, and then making the relevant redress payments. Under Scheme 1, redress payments are required to have been fully completed by January 2028, and for Scheme 2, these are to be completed by November 2027.

Consumers who have already complained are expected to receive a redress decision without needing to opt out, whereas those who have not complained at all will only be contacted and given the opportunity to opt in if they are potentially owed redress. Regardless of whether they are contacted and/or have redress paid, consumers will retain the right to challenge outcomes via the Financial Ombudsman Service, which will assess whether the scheme rules have been applied correctly.

CMS has leading specialists working within the motor finance and wider consumer credit sector on all aspects of law and regulation. We are continuing to review the FCA’s publication in detail and will be providing further analysis over the coming days. Please get in touch with the key contacts listed or your usual contacts at CMS if you have any questions or require further guidance on any of these proposals.