FCA’s Motor Finance Redress Scheme: What Firms Need to Know

The Financial Conduct Authority (FCA) is preparing to launch an industry-wide redress scheme aimed at compensating consumers affected by historic unfair motor finance practices. This marks a significant regulatory intervention, with wide-ranging implications for Firms across the sector. While the concept of a redress scheme will be covered in a separate document (link at the bottom of this page), we have asked Luis Hernandez at S&W Partners to prepare some insights which focus on the practicalities, expected scope, and what Firms should be doing now to prepare for the scheme when it comes.

The Process: From Consultation to Implementation

The FCA must follow a formal process before implementing a redress scheme. This includes:

• Identifying the problem: The FCA must determine that there has been regular or widespread failure. The ban on discretionary commission arrangements (DCAs) and findings from the Skilled Person review provide the foundation for this.
• Understanding the harm: The scheme must be prescriptive, so the FCA needs a comprehensive understanding of how harm occurred.
• Consultation: A consultation paper is expected in October 2025, outlining draft rules and proposals. Stakeholders will have the opportunity to provide feedback, which could influence the final design.
• Final rules: These are anticipated in early 2026, with compensation payments beginning later that year. Firms will be given clear guidance on scope, methodologies, and timelines.
• Monitoring: Once implemented, the FCA will actively monitor outcomes to ensure compliance and transparency.

While schemes can be voluntary, the motor finance scheme is expected to be mandatory, meaning Firms within the scheme will have limited flexibility once rules are set.

What Will the Consultation Cover?

The FCA has outlined seven principles that will underpin the scheme:

1. Comprehensiveness – aiming for a one-time resolution.
2. Fairness – balancing consumer protection with commercial realities.
3. Certainty – providing clear rules to avoid inconsistent outcomes.
4. Simplicity and cost-effectiveness – enabling Firms to plan and execute efficiently.
5. Timeliness – ensuring redress is delivered within a defined timeframe.
6. Transparency – prescribing customer communications to prevent confusion or manipulation.
7. Financial sustainability – acknowledging the risk of Firm insolvency and the limitations of the FSCS in this context.

These principles suggest the FCA is seeking a balanced approach that avoids blanket redress while ensuring meaningful compensation for affected consumers.

Scope: Who’s In and Who’s Out?

The scheme will definitely include DCAs dating back to 2007. However, the scope may extend to non-DCA arrangements depending on factors such as:

• The nature and size of the commission
• The sophistication of the customer
• The extent and manner of disclosure
• Tied commercial relationships

The FCA has not ruled out including consumer hire agreements, though clarity is still pending. Firms should also prepare for edge cases, such as deceased or gone-away customers, which may be complex but are unlikely to be excluded.

A de minimis threshold may be introduced to exclude cases where redress would be negligible, helping Firms focus resources where they are most needed.

Financial Impact: What’s at Stake?

The estimated cost of the scheme ranges from £9 billion to £18 billion. While the FCA hasn’t disclosed its methodology, the figure reflects assumptions around:

• Volume of affected agreements
• Redress calculation methods
• Interest payments
• Consumer take-up rates
• Administrative costs

Average compensation per agreement is expected to be under £950, with interest calculated at the Bank of England base rate plus 1%, resulting in a simple interest rate of around 3% per annum.

What Should Firms Be Doing Now?

Whether your Firm is in scope or not, now is the time to assess readiness. To help guide your preparations, consider the following key questions:

Financial Readiness

• Have you refreshed your financial provisions to account for potential redress payments?
• Have you allocated or ring-fenced funds to cover both compensation and administrative costs?

Data Preparedness

• Have you reviewed your historical customer and commission data going back to 2007?
• Are you cleansing and enriching customer records to ensure accurate contact details for outreach?

Governance and Oversight

• Have you established clear governance structures for complaint handling and redress delivery?
• Are you confident in your oversight of any outsourced or fractional support?

Operational Capability

• Are your customer contact systems and teams equipped to manage increased volumes of queries and claims?
• Do your technology systems have the capacity to handle the expected volume of claims and communications?
• Do you have a plan in place to manage increased operational requirements?

Strategic Engagement

• Are you engaging with internal and external experts to prepare for the scheme’s implementation?
• Have you identified gaps in your complaint handling and redress processes?

The scheme will provide clarity and structure, but Firms must still navigate areas where rules may not be prescriptive. Under the Consumer Duty, any non-prescribed communications or processes will still be subject to scrutiny—so proactive preparation is essential.

Conclusion

The FCA’s motor finance redress scheme represents a major regulatory milestone. While it aims to deliver fairness and consistency, it also places significant demands on firms in terms of financial, operational, and data readiness. With consultation imminent and implementation expected in 2026, Firms should act now to ensure they are prepared for what lies ahead.

See the What is an FCA Redress Scheme? and Preparing for the FCA Motor Finance Redress Scheme: Pre-Consultation Checklist in the BVRLA's Commission Disclosure Hub.

S&W Partners Limited