The car finance industry and Financial Conduct Authority (FCA) are awaiting a Supreme Court decision that could pave the way for a major payment protection insurance (PPI)-style redress scheme for motorists.
The car finance saga relates to “hidden, unfair” commission that lenders and dealers took from customers before 2021. The Supreme Court is aiming to deliver their judgment in July 2025.
The City watchdog has been investigating the car finance market since last year, after banning discretionary commissions on the sale of car loans such as Hire Purchase (HP) and Personal Contract Purchase (PCP) in January 2021.
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The FCA said it had received what it described as a "high number" of complaints from customers about car loan sales made prior to the ban.
In an update published on its website today (5 June), the FCA said it was considering how a possible motor finance consumer redress scheme would work, ahead of next month’s court judgment. For example, whether motorists would have to opt into the scheme or if they would be opted in automatically, and how the compensation rates would be calculated.
The regulator said: “It’s not possible to predict the outcome of the Supreme Court’s judgment, but we're engaging with stakeholders now and providing this update because we want to be able to act as quickly as possible once the Supreme Court has made its judgment, so we can start to bring greater certainty for affected consumers, firms and investors.”
According to the financial services consultancy Broadstone, the Supreme Court’s decision will have “major ramifications for the financial services market and could kickstart one of the largest and costliest redress schemes since PPI”.
Lloyds has already set aside more than £1 billion in potential redress. It is a significant provider of car finance through its Black Horse brand.
Other banks have also made provisions, with Barclays setting aside £90 million and Santander £295 million.
What is the FCA motor finance market review?
The FCA banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021, as it was concerned that they created an incentive for brokers to increase how much people were charged for their car loan.
A discretionary commission arrangement (DCA) meant that the higher the interest rate, the more commission the broker received.
But, the City watchdog then became worried about the number of complaints that firms were rejecting about DCAs, which were later upheld when challenged through other channels.
The regulator said this suggests a significant dispute between some firms and consumers on whether firms had breached legal and regulatory requirements.
It launched the motor finance market review in January 2024.
The FCA has used its powers to pause all complaints about DCAs until 4 December 2025 as it reviews the sector and these sales more widely.
How would a car finance redress scheme work?
A car finance redress scheme could work in a similar way to the payment protection insurance (PPI) scandal. The FCA would set rules firms must follow and put checks in place to make sure they do.
The regulator said it would aim to deliver a redress scheme directly to the public, so they wouldn’t need to use a claims management company or law firm.
The FCA said in its update on 5 June: “We would aim to make any scheme easy for consumers to understand and participate in, without needing to use a claims management company (CMC) or law firm.
“Consumers should be aware that by signing up now with a CMC or law firm, they may end up paying for a service they do not need and having to pay up to 30% in fees out of any award they may receive.”
The regulator noted that it would be guided by principles such as comprehensiveness, fairness, cost effectiveness and timeliness when creating the compensation scheme.
“There may be tensions between some of these principles, which will require us to consider how to strike the right balance. For example, if we seek to make a redress scheme comprehensive and ensure a wide range of affected consumers are included, it may mean consumers have to wait longer for redress because there are more claims to process,” it said.
Another issue to decide upon is whether the scheme would be “opt in” or “opt out”. The latter means customers are automatically included unless they opt out, which could be simpler for consumers; but for firms, it could be more expensive and take longer to implement, particularly if customers have changed their address.
Darren Richards, head of Broadstone’s insurance, regulatory and risk advisory division, says the decisions behind the design of a redress scheme are “complex”, for example “the opt-in and opt-out approaches will change the volume of complaints dealt with”.
He adds: “The FCA also warns that the redress approach may differ from decisions made by the Financial Ombudsman Service, which some firms have taken as a benchmark for their planning.”
In terms of next steps, the FCA says it will confirm within six weeks of the Supreme Court judgment whether it is proposing to introduce a redress scheme. If it is, it will set out timings for a consultation, which could be quite quick.
The redress scheme should be up and running next year.
The FCA added that any scheme must be fair to consumers who’ve lost out, while also ensuring the integrity of the motor finance market, so it works well for future consumers.
It warned: “If many firms were to go out of business or withdraw from the market, this could reduce competition and could make it more expensive for consumers to borrow money to buy a car in the future. Where firms fail, customers may not get any redress, as motor finance isn't covered by the Financial Services Compensation Scheme.”
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