Our Position On The FCA’s Motor Finance Compensation Scheme

The FLA has submitted its response to the Financial Conduct Authority’s (FCA) consultation on a proposed Section 404 Motor Finance Consumer Redress Scheme.

While lenders fully support a robust and credible redress programme for customers who have suffered loss, the FLA warns that the scheme as drafted cannot deliver the fairness, simplicity, finality, efficiency or certainty the FCA set out as its own guiding principles.

FLA members remain committed to providing prompt and full compensation to any customer who has genuinely suffered loss as a result of an unfair relationship under the Consumer Credit Act. That is, and must remain, the central purpose of any redress scheme. The Association is therefore urging the FCA to recalibrate the scheme so that it:

• Identifies and compensates only those consumers who have actually suffered loss;
• Protects consumers’ long-term access to affordable credit;
• Avoids awarding redress where no unfair relationship arose – a practice that would undermine fairness and damage confidence in the system; and
• Is operationally deliverable within a realistic implementation period.

A credible Section 404 FSMA redress scheme must be fair to consumers and lenders. However, the FCA’s current proposals rely on broad, blunt liability tests that would result in redress being paid to millions of customers who experienced no unfair relationship, or no loss, diverting resources away from those for whom redress is genuinely due.

To support constructive progress, the FLA’s response includes alternative methodologies for establishing liability and loss, and practical recommendations to ensure a scheme can be implemented efficiently. For example, the current obligation on firms to trace, contact and send registered letters to customers who are not owed redress is disproportionate, expensive, and risks overwhelming the system for no consumer benefit.

Motor finance lenders are committed to providing prompt and fair compensation to any customer who has suffered genuine loss. However, the Financial Conduct Authority’s (FCA) proposed redress scheme is drawn so wide that it would also compensate customers who have not suffered any loss at all.

That breaks the fundamental link between harm and remedy. Redress must restore fairness, not create windfalls, otherwise it risks undermining confidence in both lenders and the regulation itself.

The challenge stems from the FCA’s broad-brush approach to assessing liability. Under the current proposal, a lender–customer relationship could be deemed “unfair” simply because it involved one or more of the following:

• a DCA (discretionary commission agreement)
• high commission arrangement (where the commission is equal to or greater than 35% of the total cost of credit and 10% of the loan)
• tied arrangements that gave a lender exclusivity or a first right of refusal

None of the FCA’s criteria, alone or combined, automatically equate to loss:

DCA

• Although customers may have had DCA agreements, in many cases dealers used their discretion to move the interest down to win business in a highly competitive market. So, the FCA’s presumption of DCAs always causing loss would incorrectly capture millions of customers in a redress scheme even though they obtained excellent deals and suffered no loss.
• Many customers are due to get redress even when they obtained low rates that ceased to be available once dealer discretion was prohibited.
• It is difficult to reconcile the regulator’s presumptive approach with the principles of proportionality and evidence-based decision-making. Even if the objective was expediency, to simplify and speed up the delivery of redress, we see no logic in needlessly increasing the overall amount of redress when the result would be detrimental to the future availability and affordability of motor finance.

35 /10

• In the real world, some of the best deals available may have commission equal to or greater than 35% of the total cost of credit, not because there is anything inherently unfair or costly about them, but because in a low interest and low value deal, the 35% and 10% thresholds are reached very quickly.

Tied arrangements

• Tied arrangements are a longstanding feature of the market – captive finance is there to provide the cheapest option to support the purchase of the manufacturer’s vehicles. If a highly competitive rate was applied to a customer would that still be considered unfair by virtue of it having been a tied arrangement?

44% of agreements unfair since 2007?

In the opening section of its motor finance commission consultation paper, the FCA estimates that 44% of all agreements made since 2007 would be considered unfair.

That seems to us an unexpectedly high percentage, especially in a closely regulated and high-scrutiny mainstream market like motor finance – the largest point-of-sale market in the consumer credit sector – and one that the FCA has supervised for more than a decade.  

We are concerned by references suggesting that the industry has broken the law and rules pertaining to commission disclosure. Between 2007–2014, there were no specific regulatory rules at all about commission disclosure. In 2014, when the FCA took over the regulation of consumer credit from the Office of Fair Trading, old guidance was changed into rules and put into CONC, requiring that the existence of commission should be disclosed and the amount if asked.

This remained the case until January 2021 when DCAs were banned.  In October 2019, CP 19/28, the FCA noted that:  

We found that only a small number of brokers in our sample disclosed to the customer that a commission may be received for arranging finance. Where disclosures were made, they were often not prominent. We believe this is partly because our rules could be clearer on what we require.

At the same time that DCAs were banned, the FCA said that the nature of the commission should also be disclosed to customers, in an effort to clarify the intention of their previous rule.

Missing documentation

The UK GDPR does not dictate how long documentation should be kept, but the key point is that it should only be kept for as long as it is needed – based on other interlinking requirements. For instance, the FCA stated at the Treasury Select Committee in September 2025 that it required firms to keep records for 6 years after the end of the motor finance agreement, but that there was no requirement to delete at that point. So, some firms have complete records, some have incomplete records and others have no records.   

In the FCA’s consultation paper, the presumption of fault where data and documentation are not available is a significant change from what was previously legally required of lenders with respect to document retention.

The FCA’s comments that Credit Reference Agencies would be able to fill in the blanks is inaccurate as they would only have the credit information – the amount of the loan – but not information about the agreement – whether it was a DCA, what the rate spread was, and whether or how commission was disclosed.