The FCA has published its long-awaited consultation on its proposed industry-wide redress scheme for motor finance customers, as foreshadowed by the FCA following the Supreme Court's decision in the Hopcraft and another v Close Brothers Limited appeals in August this year.

Background

Since January 2024, the FCA has been reviewing the past use of motor finance discretionary commission arrangements (“DCAs”) to examine whether consumers have been disadvantaged by firms’ misuse of such arrangements. The FCA's general review of motor finance agreements found that firms had failed to disclose adequately the nature of relationships between lenders and brokers and of the commission charged. Specifically, where agreements involved DCAs, it was found that customers had not been informed of the DCA.

On 1 August 2025, the Supreme Court published its judgment in Hopcraft, which found that in respect of one of the cases in the joint appeal (Johnson), a lender had acted unfairly because of the undisclosed nature of the commission paid to the broker and its amount, which rendered the relationship between the lender and borrower unfair. In light of the judgment and the FCA's own review findings, the FCA has concluded that it is appropriate to move ahead with a compensation scheme. We have previously examined the FCA's previous announcements of its intention to introduce a scheme and the FCA's indications about key considerations for such a scheme. For further detail on the motor finance litigation and the Supreme Court judgment, please refer to our Clifford Chance briefing.

The FCA's proposed scheme in overview

The general scope of the proposed scheme extends to unfair agreements made on or after 6 April 2007 and before 1 November 2024 where commission was payable to the broker by the lender. The FCA proposes that lenders deliver the scheme, seeking contributions from brokers where appropriate. Under the scheme, the FCA would deem agreements unfair in circumstances where there has been insufficient disclosure of one or more of:

• a DCA;
• a high commission (where the commission is equal to or greater than 35% of the total cost of credit and 10% of the loan); or
• a contractual relationship providing the lender exclusivity or right of first refusal.

Further details are set out in the FCA's statement to the markets and consultation paper.

How has the FCA decided the time period to be covered by the scheme?

The FCA has chosen the 6 April 2007 start date to align with the coming into force of section 140A of the Consumer Credit Act 1974 ("CCA") and the Financial Ombudsman's ("FOS") remit over consumer credit complaints. The FCA has anticipated firms' concerns about the historic reach of the scheme, particularly in relation to limitation and record-keeping.

The FCA proposes that lenders assess whether a claim is time barred, applying the principles that normally apply for claims made under section 140A of CCA (i.e. a six-year limitation period), when a lender determines whether the relevant case is a scheme case. The FCA has proposed that claims in which the limitation period has expired before the final scheme rules are made will be ineligible under the scheme. However, it has indicated that it does not expect that there will be many such cases or that firms should be routinely finding that cases are out of time. The FCA relies on section 32(1)(b) of the Limitation Act, which provides that the limitation period does not begin to run where a relevant fact is deliberately concealed from the consumer by the defendant, until such time that a consumer could reasonably have discovered that fact. The consultation paper notes in relation to section 32(1)(b) that inadequate disclosure of a relevant feature of the lending arrangement is the essential basis of the unfair relationship claims that the proposed scheme intends to capture.

The end date of the period covered by the scheme has been chosen to coincide with the date of the judgment handed down by the Court of Appeal on 25 October 2024. This means that all loans originated on amended documentation after that judgment from 1 November 2024 will fall outside the scope of the scheme.

As to issues with historic record keeping, where evidence of what was disclosed to the consumer is missing, the consultation paper makes clear that lenders must presume that the disclosure was inadequate. This is balanced against firms' ability to evidence adequate disclosure through standardised or template materials, provided it can be verified that such materials were in use at the time of the transaction.

Which (and how many) cases will be covered?

On the basis of its proposed scope, the FCA estimates that 44 per cent of agreements made since 2007 (i.e. 14.2 million agreements) will be considered unfair. Despite the significant number of agreements falling within the scheme, the FCA has indicated that it considers that the impact of administering the scheme will not substantively disrupt the motor finance market in terms of product availability and competition among lenders.

Where one or more of the criteria stipulated above are satisfied, lenders will be able to rebut the presumption of unfairness in some cases. For example, compensation may not be payable where it can be shown that there was adequate disclosure, where it can be demonstrated that the broker selected the lowest interest rate at which they would not have made any additional commission (in DCA cases) or where it can be proven that the customer was sufficiently sophisticated, on the basis of clear, contemporaneous and customer-specific evidence, to have been aware of the relevant feature(s) complained about.

The proposed scheme is to consist of a hybrid of opt-in and opt-out models:

• The estimated 4 million customers who have already complained will be included in the scheme unless they opt-out (and if they do, they will not be able to opt back in). Lenders would need to contact these customers within three months of the start of the scheme. The FCA has indicated that these cases will likely be resolved sooner than those of customers who complain in response to contact from lenders (since, although many complaints have been paused pending the outcome of the motor finance litigation, firms have still been required to progress investigations).
• Lenders will then need to contact customers who have not complained (to the extent they can be identified) and ask if they would like to opt-in.
• Any customers who have not been contacted will be able to ask their lender to review their case within one year of the start of the scheme.
• Customers who have already been compensated for complaints covered by the scheme will be excluded.

In calculating proposed redress, the FCA has taken into account the Supreme Court's approach in Johnson. For rare customers whose cases clearly align with the Johnson case (involving a contractual tie and commission equal to, or greater than, 50% of the total cost of credit and 22.5% of the loan), the FCA proposes to follow the Supreme Court in awarding repayment of commission plus interest. However, for all other cases, consumers would be compensated at the average of an estimation of loss based on the method the FCA decides and the commission paid.

What is the role of the FOS?

The FOS will adjudicate disputes on whether the scheme rules have been followed. The FOS will also continue to resolve complaints that it has already received (not through the scheme).

What is expected of firms resolving claims under the scheme?

Alongside the consultation paper, the FCA has published a Dear CEO letter it has sent to all firms involved in motor finance lending and broking from 2007. It emphasises the importance of lenders and brokers taking immediate action to deal with existing portfolios of complaints, rather than waiting for the outcome of the consultation exercise. It also makes clear that the FCA expects firms (including those which may have acquired books of customers from others) to start planning now (if they have not already) for how they will identify impacted customers and address any gaps in data currently held, to ensure that they have sufficiently clear and robust processes to handle cases and deliver redress at scale, and that they are appropriately resourced to do so.

In his recent appearance before the House of Commons Treasury Select Committee last month, the FCA's CEO Nikhil Rathi indicated that, whilst many firms are engaging constructively, not all firms were cooperating with the process as fully as the FCA would expect. Even in the current enforcement environment where the FCA is consciously commencing fewer investigations, given the profile of the motor finance redress scheme and significant levels of interest in the extent of redress and the pace at which it is delivered, it would not be surprising to see the FCA proceed to enforcement action relatively swiftly in cases of sustained non-cooperation from firms.

Next steps

As to next steps, the consultation on the proposed redress scheme closes on 18 November 2025. If such a scheme is introduced, the FCA's policy statement and final rules will follow by early 2026 and payouts will commence later in the same year. The FCA estimates that the average amount of compensation will be £700 with around 85 per cent of eligible customers taking part and the total amount of redress to be paid to be about £8.2 billion (including interest).