FCA prepares for industry-wide motor finance redress scheme, cuts out claims firms

The UK Financial Conduct Authority (FCA) looks likely to impose an industry-wide redress scheme for mis-sold car finance, as this would be more “orderly and efficient” for lenders than consumers pursuing individual claims through the courts and the Financial Ombudsman Service (FOS). Consumers would not have to use claims management companies (CMCs) to pursue compensation.

The FCA has been conducting an investigation into historic sales of car finance since January 2024. In a statement on March 11, the regulator said should the Supreme Court uphold the decision in October by the Court of Appeal that were “hidden” commission arrangements between lenders and motor brokers, it would take this “into account” when concluding whether motor finance customers have “lost out from widespread failings by firms”. The Supreme Court is set to hear the appeal on April 1-3.

John Cronin, founder of research and analysis firm SeaPoint Insights, said the FCA was taking a “very pragmatic” approach. “It seems intent on moving forward as swiftly as possible to close out the matter once it has had time to digest the Supreme Courtʼs decision,” he said.

The FCA can impose an industry-wide redress scheme using powers granted in Section 404 of the Financial Services and Markets Act 2000. It has previously used these to impose compensation schemes for British Steel pensioners and Arch Cru investors, but this would be the biggest such scheme to date.

Under the scheme it would still be up to lenders to determine if finance had been mis-sold and pay compensation, but the FCA said it would “set rules firms must follow and put checks in place to make sure they do”.

Cronin welcomed the Supreme Court’s decision to allow the FCA to intervene in the case. “Given it regulates the space, it is wise for the court to reflect on why the FCA designed its rules in the manner in which it did — and why the FCA did not go as far as what the Hopcraft judgment implies when it was calibrating the rules,” he said.

Last month, UK banks raised their provisions for redress to £2 billion, however some analysts have estimated that the bill could top £30 billion. The share prices of Lloyds Bank, Santander, Barclays, Close Brothers, Investec and First Rand all fell following the FCA statement.

Claims management companies

The FCA was not due to provide an update on its investigation until May, but last week the FOS announced it had received a fresh wave of complaints about motor finance sales following the Court of Appeal decision. Almost 80% of 15,956 complaints about hire purchase motor finance, and 82% of the 2,702 conditional sale motor finance complaints, it received between October and December 2024 were submitted by CMCs.

A 2019 FCA review of motor finance sales found that the average customer was paying around £1,100 more over four years as a result of discretionary commission agreements between lenders and motor brokers. Today, the regulator said an industry-wide redress scheme would be “simpler” for consumers than using CMCs and they could keep all of their compensation, as CMCs can take up to 30%.