FCA Outlines How Proposed Motor Finance Compensation Scheme Could Work
A new update from the Financial Conduct Authority sheds more light on forthcoming redress scheme.
The UK’s financial regulator has provided further details on how a compensation scheme for motorists affected by undisclosed commission in car finance agreements could operate.
The Financial Conduct Authority confirmed that it received around 1,000 responses to its consultation on proposals for a redress programme designed to compensate customers who were treated unfairly in historic motor finance deals.
The consultation forms part of the regulator’s response to concerns about commission arrangements used widely in the car finance market between 2007 and January 2021. In many agreements, brokers or dealerships received payments linked to the interest rate applied to the loan, which created incentives to increase borrowing costs without customers being fully informed.
Following the consultation process, the FCA expects to publish the final rules for the compensation scheme in late March.
How the proposed compensation scheme would work
The regulator has outlined a framework designed to make the compensation process largely automatic for consumers.
Under the proposals, lenders and finance providers would review their own historic agreements to identify drivers whose deals included commission structures that may have caused financial harm. Once identified, firms would calculate the redress owed and contact affected customers directly.
After the final rules are published, finance providers would have an implementation period of three months to prepare systems and processes for the scheme. Older agreements may require additional operational work, so firms could receive up to five months to complete the implementation phase in those cases.
Once this preparation period ends, firms would begin reviewing affected agreements and issuing compensation decisions.
A key change concerns how existing complaints will be treated. Customers who submit complaints before the scheme begins will automatically fall within the process. Their lender will review the agreement and, within three months of the end of the implementation period, inform them whether compensation is owed and how much they should receive.
Consumers who receive a redress offer will be able to accept the payment immediately, without waiting for any further regulatory determination.
Communication changes and fraud safeguards
The FCA has also clarified how lenders should contact customers during the compensation process.
Firms will not be required to use recorded delivery letters when communicating compensation decisions. Instead, they will be able to contact customers through a range of channels, provided appropriate safeguards exist to reduce the risk of fraud.
This flexible approach reflects the expected scale of the programme. The FCA has indicated that millions of motorists could receive compensation once lenders begin reviewing historic finance agreements.
Compensation expected from 2026
If the current timeline proceeds as expected, the regulator anticipates that compensation payments could begin during 2026.
The FCA continues to encourage motorists who believe their finance agreement included undisclosed commission to submit a complaint to their lender now. Doing so ensures the contract will be reviewed once the scheme enters into operation.
Who could qualify for compensation?
Eligibility will depend on how the finance agreement was structured. A large number of motor finance deals relied on discretionary commission arrangements, where intermediaries had influence over the interest rate applied to the loan.
Under this structure, higher interest rates could generate larger commission payments for the broker arranging the finance.
Motorists who entered into an agreement without clear disclosure of those payments may fall within the scope of the FCA’s redress scheme.
Situations that could potentially qualify include motorists who:
- Arranged PCP or hire purchase finance through a dealership or intermediary
- Signed agreements between 2007 and January 2021, when these commission structures were widely used
- Received little or no explanation that commission formed part of the finance arrangement
- Paid borrowing costs that may have been influenced by commission incentives
The final eligibility criteria will become clearer once the FCA publishes its definitive rules.
A quick eligibility check can help determine whether a finance agreement may fall within the scope of the scheme.
Use our motor finance eligibility tool to review your agreement. The process takes only a few minutes and can indicate whether a PCP or hire purchase contract could qualify once the FCA compensation programme begins.
