The FCA's Motor Finance Compensation Scheme: A Summary

A Summary of the motor finance compensation scheme

The FCA has released the long-awaited consultation on the proposed compensation scheme for customers of unfair motor finance agreements. The regulator expects that payouts – averaging £700 per customer - could start next year. They are also consulting on extending how long firms have to provide a final response to motor finance complaints to 31 July 2026.

What were discretionary commission arrangements?

Discretionary Commission Arrangements – which the FCA banned in January 2021 – were widespread: between April 2007 and 2021, around 61% of all motor finance agreements involved a DCA. Thousands of complaints were submitted, and firms had rejected 99% of complaints. By March 2025, the Financial Ombudsman had received over 80,000 complaints.

The FOS decided that brokers and lenders had breached regulatory requirements regarding commission disclosure, and that it considered that the court would find the relationship between the lender and the consumer was unfair under Section 140A of the Consumer Credit Act 1974. The High Court found that the FOS was entitled to find the relationship was unfair.

Simultaneously, the FCA conducted a review which paused DCA complaint handling timescales. During the review, the Court of Appeal found that the brokers in three cases “breached their legal duties to their customers by taking commission from the lenders without the consumers’ ‘informed consent’ and the lenders were liable for the breach by the brokers.” In late 2025 the Supreme Court confirmed that non-disclosure of commission does not necessarily make a relationship unfair but did conclude that the relationship was unfair in one case - due to the size of the undisclosed commission - and that there was inadequate disclosure of the existence of the commission and the contractual tie was a breach of the FCA’s rules.

What the FCA have Decided

The regulator is satisfied that the cost of the proposed scheme is reasonable, calculating that it would cost the industry £6.6bn more in the absence of a redress scheme.

The scheme would cover motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable by the lender to the broker. It will be free for customers to access. Importantly, the FCA proposes that lenders will deliver the scheme, but brokers will need to support lenders through providing information the lenders need to be able to operate the scheme “promptly”. The FCA also notes that “lenders may seek contributions from [brokers].” As such, to prevent having the same issue dealt with separately by the broker and the lender, the FCA proposes that where the initial complaint is received either by the broker or the FOS, the complaint must be sent to the lender for determination.

The FCA is encouraging customers who are eligible and who have not yet complained to do so now: firms should be prepared for an increase in these complaints.

Lenders will be obliged to contact affected customers who have not submitted a complaint once the scheme goes live. If the customer does not reply within 1 month, lenders should then assume they should review the case.

FCA's Proposals

The proposal is that people will receive compensation under the scheme if they weren’t told details of at least one of three arrangements between the lender and the broker who sold the loan:

1. A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.

2. A high commission arrangement (35% of the total cost of credit and 10% of the loan).

3. A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.

There will be 4 stages to the scheme:

1. Pre-scheme checks by firms to see if agreements are included or excluded, contact with consumers to explain if their case can be assessed and any actions they should take. Consumers who have complaints before the start of the scheme will be able to opt out of the scheme. Consumers who have not complained will need to opt in to be reviewed within the scheme.

2. Firms assess whether they are liable to pay redress. Firm presumes there was an unfair relationship, and the consumer suffered loss unless they have evidence which rebuts this.

3. Firms calculate redress depending on relevant arrangements present: a) refund of commission remedy b) hybrid remedy c) APR compensation remedy.

4. Firms send redress determination to consumers and pay redress where necessary.

   
   

Calculating Redress under the Scheme

The process for calculating the redress amount is set out in some detail in Chapters 8-10 of the Consultation, but in brief if there is a very high commission arrangement and a tied arrangement the redress will be the commission repayment remedy. If the APR adjustment remedy is higher than the commission repayment remedy, redress will be the APR adjustment remedy. If there is an inadequately disclosed DCA, high commission arrangement, or tied arrangement, the redress will be the hybrid remedy (if the APR adjustment remedy is higher than the hybrid remedy, redress will be the APR adjustment remedy). For a full overview see: https://www.rbcompliance.co.uk/post/how-to-calculate-redress-motor-finance-compensation-scheme

Firms will also need to be aware of the impact of Claims Management Companies; FCA research suggests that just 4 in 10 customers are aware that they can make a claim without needing to go through a CMC or a law firm to make a claim.

Complaints about motor leasing agreements are not covered as the FCA notes they are not caught by legislation relating to unfair relationships and so are not covered by the scheme. This means that firms would need to start sending final responses to any motor leasing complaints from 5 December 2025.

The Consultation is open for comments: comments on the redress scheme proposals should be submitted by 18 November 2025 and comments for proposals to further extend how long firms have to provide a final response to certain motor finance complaints is 4 November 2025.

The FCA will confirm by 4 December 2025 whether they will extend the deadline for motor finance firms to provide a final response to relevant complaints. If they decide to introduce a redress scheme, they expect to publish the policy statement and final rules by early 2026.