FCA considers motor finance redress scheme

The Financial Conduct Authority (FCA) has published its key considerations in anticipation of a possible motor finance redress scheme pending the outcome of the Supreme Court appeal in Johnson v FirstRand Bank Limited.

Background

As those who follow the vehicle finance market will be aware, the historical use of discretionary commission arrangements, whereby the broker's commission is linked to the interest charged on a loan, has been causing considerable furore. In April 2025 the UK Supreme Court heard the appeal in Johnson v FirstRand Bank Limited, on whether it was lawful for motor finance brokers to receive a commission from the lender without obtaining the customer's informed consent. The Supreme Court's judgment is expected to be delivered in July 2025.

As early as January 2024, we predicted that there might be an industry wide redress scheme under s.404 of FSMA, concerning discretionary commission arrangements and it seems this prediction is coming ever closer to being accurate.

In March 2025, the FCA published a statement confirming that it's likely they will consult on an industry wide redress scheme if, taking account of the Supreme Court's upcoming decision, they conclude that customers have 'lost out' due to widespread failings. The FCA has now published its considerations on a potential redress scheme.

The FCA's Proposals

Although the FCA notes that it cannot predict the outcome of the Supreme Court's judgment, it has been speaking with consumer groups, firms and industry trade bodies on their views if a redress scheme was to be introduced.

The FCA has set out legal tests that must be met for a redress scheme to be introduced. This would involve widespread or regular failure by firms to comply with requirements, that results in consumers suffering loss or damage in respect of which a court would grant a remedy – this being the test required by s.404 of FSMA. The FCA would also have to consider it desirable for a redress scheme to be established over other routes that consumers could use to obtain redress. For context, the Financial Ombudsman Service received 18,658 new complaints concerning car loans in the fourth quarter of 2024, which is a 33% increase from the previous quarter and three times the number from the same period in 2023.

The principles that will guide a redress scheme would be comprehensiveness, fairness, certainty, simplicity and cost effectiveness, timeliness, transparency and market integrity. The FCA has acknowledged that there may be tensions between some of these principles and that they will strike the right balance, with the consultation playing an important role in getting the balance right.

The FCA has a number of options under consideration on how the redress scheme may be designed:

• Opt-in redress scheme – customers would have to confirm to their firm, within a certain time period, that they wish to be included in the scheme. The FCA has noted that this approach could be challenging, with many consumers potentially being unsure of which firms they have agreements with.
• Opt-out redress scheme – customers would be automatically included in the scheme unless they opt out. The FCA believes that this option would be simpler for customers and may reduce speculative claims. However, it is acknowledged that it could be more expensive for firms and take longer to implement.

In terms of calculating redress, the FCA notes that a wide range of options have been suggested, including those based on FOS decisions. The FCA has confirmed that they have not come to a conclusion on how redress should be calculated and this could well be a key point of discussion.

They also noted that any redress calculations must be fair to consumers who have lost out, while also ensuring the integrity of the motor finance market. The FCA is mindful that large numbers of firms may go out of business or withdraw from the market if the redress scheme does not properly balance these factors. If this were to happen the FCA believes that it would reduce competition in the motor finance market and could potentially make it more expensive for consumers to obtain motor finance in the future. To illustrate the risks in terms of calculating redress, the regulator also highlighted that if firms do go out of business, customers may not receive any redress as the Financial Services Compensation Scheme does not cover motor finance.

Next Steps

The FCA has confirmed that they will confirm within 6 weeks of the Supreme Court judgment, whether they are proposing to introduce a redress scheme. If the FCA does decide to introduce a redress scheme it will issue a consultation on how the scheme would work in practice, the proposed timings for its introduction, and a cost benefit analysis. Following the consultation, the FCA will confirm whether they are going ahead with the redress scheme and will set out when they expect firms to implement the rules, which is currently expected to be in 2026.