The FCA Provides an Update on Potential Car Finance Redress

Published: 17th June 2025

After months of anticipation, the Financial Conduct Authority has issued a detailed update on its preparations for a potential compensation scheme related to car finance agreements. While the final decision remains subject to a forthcoming Supreme Court ruling, expected in July, the FCA is laying the foundations for what could become one of the most significant redress initiatives in the UK’s motor finance sector.

Consumers who entered into car finance agreements before 2021, particularly Personal Contract Purchase (PCP) or Hire Purchase (HP) deals, may be directly affected. At the centre of the issue are discretionary commission arrangements (DCAs), which allowed brokers to increase interest rates in exchange for higher commission. These practices were prohibited from January 2021, but millions of older contracts remain under scrutiny.

Following the ban, a surge in complaints emerged, many initially rejected by lenders. However, in 2024, the Financial Ombudsman Service began ruling in favour of drivers. The legal debate has since progressed to the Supreme Court, whose verdict could reshape the landscape for affected borrowers.

What the Redress Scheme Might Look Like

According to the Financial Conduct Authority, if the Supreme Court finds that consumers were unfairly charged, the regulator will launch a formal consultation on an industry-wide redress scheme. This would mark a coordinated effort to ensure affected individuals receive compensation without navigating complex legal channels.

The proposed scheme would establish clear rules on how firms assess complaints and calculate repayments. It would also include oversight measures to ensure those rules are followed properly across the board.

When Redress Is Justified

The financial authority also clarified that it can’t launch a compensation scheme spontaneously. Legally, there must be evidence of widespread non-compliance across the industry.

Specifically, two conditions must be met: first, that drivers have experienced financial harm serious enough to justify legal remedy; and second, that creating a dedicated redress programme would be a more effective solution than existing complaint routes.

Together, these benchmarks ensure that any scheme is necessary, proportionate, and better than the alternatives.

Stakeholder Engagement and Consultation Plans

While the Supreme Court’s ruling is still pending, the FCA has already begun engaging with key stakeholders, including consumer groups, financial firms, and trade associations, to explore how a potential redress scheme could be structured. These early discussions are helping to identify practical challenges and shape a possible framework ahead of any formal proposal.

Because of the groundwork already being done through this phase, the formal process may be shorter than usual. A six-week consultation window is under consideration, allowing the FCA to act swiftly once the Court delivers its judgment.

Guiding Principles Behind the Proposed Scheme

If approved, the redress scheme will be designed around a set of core principles.

First, it would aim to cover a broad range of complaints, minimising the need for individuals to seek justice through the courts. It would also prioritise fairness, ensuring that both the identification of wrongdoing and the calculation of compensation are handled with consistency and impartiality.

Certainty is another key priority. Both consumers and firms need a clear sense of closure once claims are resolved. To support that, the FCA is also focused on delivering outcomes within a reasonable timeframe, avoiding lengthy delays that often frustrate claimants.

Ease of access and affordability are equally important. The scheme should be straightforward for drivers to use and cost-effective for firms to implement. In addition, it would emphasise transparency, making decisions and performance data publicly available to reinforce public confidence.

Finally, the FCA wants the scheme to contribute to long-term market stability. That means restoring trust in motor finance by ensuring the industry continues to offer competitive, fairly priced credit.

Defining Who Qualifies: Opt-In vs Opt-Out

One of the key decisions in shaping the redress scheme will be how consumers are included, whether they must actively sign up (opt-in) or are automatically included unless they choose not to take part (opt-out).

An opt-in model would require individuals to notify their finance provider within a set timeframe that they wish to be part of the scheme. While this approach may give drivers more control, it presents practical challenges. Many people might no longer remember which firm provided their car finance, or may be unsure whether they’re eligible at all. As a result, some affected individuals could miss out.

An opt-out model, in turn, would automatically enrol eligible consumers into the redress scheme unless they actively choose not to take part. From a consumer perspective, this approach tends to be more straightforward, especially for those who may not realise they’re affected or no longer have records of their finance agreements.

For firms, however, this route comes with added complexity. Administering compensation on a larger scale, particularly when customers may have moved or changed contact details, could increase both costs and the time required to deliver outcomes.

Striking the right balance here is crucial. A broader scheme that captures more drivers might take longer to administer, while a narrower one may leave people behind. The FCA has made clear that input from the public during the consultation period will be vital in helping determine the most effective path forward.

How Compensation Could Be Calculated

There’s no shortage of figures being circulated when it comes to potential redress, with some claims driven by optimistic assumptions from law firms and claims management companies. However, the FCA is expected to take a more measured approach, grounded in evidence, legal principles, and broader market implications.

Rather than simply replicating past ombudsman decisions, the regulator will weigh a full range of data, including its own investigations and the Supreme Court’s conclusions. This process is designed to establish not just whether harm occurred, but the extent of any financial loss suffered by consumers.

Crucially, any compensation model must strike a balance. It needs to be fair to those who’ve overpaid while also safeguarding the stability of the motor finance sector. Overly aggressive redress demands could push some firms to exit the market or shut down entirely, leading to less competition and higher borrowing costs in the long run.

Moreover, there’s another risk: if firms collapse, affected drivers might not receive any settlement at all, as motor finance falls outside the Financial Services Compensation Scheme.

What Happens Next?

Once the Supreme Court delivers its judgment, the FCA will announce within six weeks whether it intends to move forward. If the decision is to proceed, the regulator will also outline when the public consultation will begin.

That consultation will include a full proposal detailing how the scheme would operate, including draft rules, implementation timelines, and a cost-benefit analysis reviewed by independent experts. Current expectations suggest implementation would begin in 2026, subject to the outcomes of the consultation.

Should You Use a Law Firm or Handle It Yourself?

The FCA has stated its aim to make any redress scheme simple enough for consumers to manage independently. However, that doesn’t mean legal support isn’t worth considering.

Navigating a financial claim, even a well-designed process, can be time-consuming and unfamiliar. For those unsure about their eligibility, struggling to locate old finance documents, or simply wanting peace of mind, a regulated law firm can offer reassurance and expertise.

It’s also worth remembering that while the scheme may be accessible, it won’t chase you. It will likely involve deadlines, eligibility checks, and paperwork. A legal team can take that burden off your shoulders and ensure everything is submitted accurately and on time.

So while the scheme does not require legal help, many consumers may find that having someone experienced in their corner is well worth it, especially when the outcome could involve thousands of pounds in compensation.

Check now to see if you’re eligible to reclaim.