On Sunday 3^rd August 2025, the FCA confirmed it would consult on a compensation scheme which seeks to provide redress to consumers who were treated unfairly when taking out motor finance.

This announcement followed Friday’s landmark ruling by the Supreme Court on three cases where the Court of Appeal had previously concluded that commission payments to car dealers were unlawful.

On Friday the Supreme Court overturned two of these cases, however, in one case, the Supreme Court ruled that, due to the particular circumstances of the case, the commission arrangements resulted in an unfair relationship between the consumer and the lender under s140A of the Consumer Credit Act (CCA) and, therefore, the commission was unlawful.

It is clear that the FCA now believes that a formal compensation scheme is the best way to provide clarity and certainty to consumers, firms and investors as quickly as possible, and ensure the consistency of claims handling.

To this end, the FCA has now committed to publishing a consultation paper by early October 2025 which will set out proposals for a compensation scheme (the scheme). Beyond this the FCA anticipates that the scheme will be finalised in time for complainants to start receiving compensation next year.

What could the redress scheme cover? 

On Friday, the Supreme Court ruled that in many cases commission payments could be legal, but also that in certain circumstances lenders many have acted unfairly and, therefore, unlawfully. For example, in the case of Johnson, the size of the commission paid and the manner in which it was disclosed contributed to the conclusion that the commissions arrangements in this case were unfair.  

The FCA has stated that it will propose a scheme that covers discretionary commission arrangements (DCAs) – where the broker could adjust the interest rate offered to a customer.

However, Friday’s Court ruling on the Johnson case has forced the FCA to also consider whether some non-discretionary commission arrangements should be included on the basis that the commission arrangements were unfair under the CCA.

Regarding the latter, the Supreme Court stated that several factors could indicate it had identified an unfair relationship and contravene the CCA, whilst recognising it depends on the facts of each case. Such factors could include:  

• the size of the commission relative to the charge for credit
• the nature of the commission, for example, whether it is discretionary
• the characteristics of the consumer
• compliance with regulatory rules
• the extent and manner of disclosure

The FCA will now need to consider the above when deciding the scope of the redress scheme.

For example, the FCA has stated:

‘The Supreme Court found that a high and undisclosed commission – in this case (Johnson) 55% of the total cost of the credit – was ‘a powerful indication’ of an unfair relationship. The court also found that this was a breach of our rules, as disclosure of so high a commission would have had a ‘material impact’ on the customer’s decision.

We will, therefore, need to consider what size of commission in the context of the overall finance arrangements may point towards unfairness if not disclosed’

The FCA’s ‘criteria for unfairness’ are likely to come under some challenge from the motor finance industry, who will be keen to ensure that the ‘bar’ for unfairness is not set too low.

The FCA has also stated that the scheme should cover motor finance agreements dating back to 2007, in order to be consistent with the complaints the Financial Ombudsman can consider and to ensure the scheme is comprehensive.

This again is likely to be challenged through the consultation process on the grounds that firms and consumers may no longer hold records pertaining to older agreements.

The FCA is still to decide whether the scheme should be implemented on an opt-in or opt-out basis, however, it has  stated that it anticipates that firms will be required to (as far as possible) make customers aware they may be eligible to claim and how claims can be made.

What should motor finance companies do next?

Whilst motor finance firms will no doubt wish to consider the Supreme Court’s ruling in the Johnson case, in particular the specific factors on which the Supreme Court deemed the relationship to be unfair, it is now clear that a redress scheme for DCA’s is imminent and there are some critical steps that firms should be taking now to prepare for this.

• Define the affected customer base
  • Which customers had discretionary commission agreements?
  • What is the quality and completeness of the data relating to these customers, are there critical data points that need resolving?
  • For non-DCA customers, are there certain agreements with ‘high’ commission levels
• Review policies and procedures
  • Are processes and procedures designed, compliant and suitable for scale when responding to a redress scheme for DCA cases?
  • Determine the disclosure practices of motor dealers who distributed their finance products
  • Identify any exclusive distribution arrangements with motor dealers and determining whether these were consistent with the scope of service they set out to consumer
• Operational resource planning
  • Are teams adequately resource to respond to the expected increase in demand?
  • A rise in volumes of affordability complaints & Data Subject Access Requests (DSAR) is already apparent across leading motor finance Ffrms
  • Customer service and general business-as-usual functions will also see a knock-on effect of the scheme, with service level agreements and regulatory requirements still at risk
  • With the expected complexities of dealing with the fairness of a relationship and a thorough investigation of the individual circumstance of a case, more experienced resources and qualified resources will be needed to resolve cases.
• Automation, workflow and reporting
  • Consider how to leverage technology to enable scalable, accurate, and cost-effective remediation of large customer populations

Design workflow processes and tooling that provide end-to-end control, transparency and auditability to both internal stakeholders and the regulator.

The FCA may not expect redress payments to be made this side of Christmas, but it’s important for boards to understand their exposure and to start preparation immediately.

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