The FCA has made a number of changes to the proposed redress scheme in light of feedback received.
By Becky Critchley, Nicola Higgs, Rob Moulton, and Charlotte Collins
Key Points:
- The FCA has split the scheme into two time periods and introduced implementation periods. The scheme will commence on 30 June 2026 for loans taken out from 1 April 2014, and on 31 August 2026 for earlier agreements.
- Firms are required to submit implementation plans to the FCA within six weeks, which must include details of the Senior Manager responsible for delivery of the scheme, as well as attestations from a Senior Manager confirming the firm has appropriate processes, systems, and controls in place to deliver the scheme.
- The estimated total cost to firms has decreased from £11 billion to £9.1 billion, though average expected compensation per consumer has increased from £695 to £830, with compensation expected to be capped in around one-third of cases.
- The FCA has introduced several new exceptions, and has also sought to streamline processes in a number of respects to ensure that the scheme can be implemented effectively.
Introduction
After markets closed on Monday 30 March 2026, the FCA published its Policy Statement (PS26/3) on motor finance redress. The FCA consulted on the redress scheme in October 2025 (see this Latham blog post), and the consultation attracted a high degree of interest from stakeholders, receiving over 1,000 responses.
The FCA is keen to emphasise that it has listened carefully to the feedback it received, aiming to strike the best possible balance between consumers and firms. As a result, it has made a number of changes to the proposals it consulted on.
Key Changes From the Consultation
The table below summarises some of the key changes between the consultation and the final scheme.
| Topic | Consultation | Final Rules |
|---|---|---|
| Scheme time period | One single scheme, covering 6 April 2007 – 1 November 2024 | Two schemes, covering 6 April 2007 – 31 March 2014 and 1 April 2014 – 1 November 2024 |
| Implementation period | N/A | Three months for loans taken out from 1 April 2014; five months for earlier agreements |
| In scope agreements | ||
| Number of estimated agreements eligible for compensation | 14.2 million | 12.1 million |
| High commission arrangement | Defined as at least 35% of the total cost of credit and 10% of the loan | Defined as at least 39% of the total cost of credit and 10% of the loan |
| Exception related to tied arrangements | Agreement is in scope if the consumer was not clearly told about a contractual arrangement or tie between the lender and broker, which provided exclusive or near-exclusive rights to lenders to provide credit | Agreement is in scope if the consumer was not clearly told about a contractual arrangement or tie between the lender and broker, which provided exclusive or near-exclusive rights to lenders to provide credit, except where the lender can evidence that there were visible links with a manufacturer and franchised dealer |
| High-value loans | In scope | Loans for amounts higher than 99.5% of other loans that year are not in scope |
| De minimis commission | N/A | New exception if commission was £120 or less for agreements beginning before 1 April 2014 or £150 or less for agreements from that date |
| Zero APRs | N/A | New exception for agreements where the borrower was not charged interest |
| Non-operative tied arrangement | N/A | New exception if the firm can demonstrate a tied arrangement was not operated in practice |
| No better deal | Can rebut presumption of unfairness if the lender can prove that it was fair not to disclose the arrangements or that the consumer did not suffer any loss | Modified to enable firms to rely on a wider range of evidence |
| Level of redress | ||
| Estimated total cost to firms | £11 billion | £9.1 billion |
| Estimated total amount of redress | £8.2 billion | £7.5 billion |
| Estimated average compensation | £695 | £830 |
| Cap on redress | N/A | Payouts will be capped in around one in three cases |
| Relevant remedy | Cases with very high commission and a tie to receive commission plus interest | Cases with very high commission and a tie, a DCA, or both, to receive commission plus interest |
| Interest | Simple interest to be paid on redress, based on the annual average Bank of England base rate per year plus 1% | Same formulation, but there will be a minimum interest rate of 3%, no rounding will be applied, and consumers will not be able to challenge the compensatory interest rate |
| Process | ||
| Communication methods | Firms are required to write to customers via recorded delivery | Firms may use a range of communication methods |
| Contacting consumers who have complained | Firms are required to ask consumers who have complained if they wish to opt out of the scheme | Firms need to contact consumers who have complained to tell them whether they are owed redress and how much, but do not need to ask if they wish to opt out |
| Contacting consumers who have not complained | Firms are required to ask consumers who have not complained if they wish to opt in to the scheme | Firms are only required to contact consumers who have not complained if they are likely to be owed compensation |
| Accepting redress | Consumers are only able to accept redress offer after the final determination, but non-response may be treated as acceptance | Consumers receiving a redress offer are able to accept it immediately, but active consumer acceptance is required |
Outline of the Final Scheme
Timing
Motor finance agreements taken out between 6 April 2007 and 1 November 2024 will be covered by the scheme, as consulted on. However, the FCA is introducing two schemes, covering 6 April 2007 to 31 March 2014 and 1 April 2014 to 1 November 2024, so that if the earlier period is subject to legal challenge (for example, by way of judicial review), the scheme can still go ahead for the later period.
In line with the FCA’s update earlier this month, the FCA has decided to introduce an implementation period of three months following publication of the Policy Statement, with up to five months for older agreements. Therefore, the scheme will commence on the following dates:
- 30 June 2026 for loans taken out from 1 April 2014
- 31 August 2026 for earlier agreements
Scope
Consumers will be compensated if they were not clearly told that there was:
- a discretionary commission arrangement (DCA), which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission;
- a high commission arrangement, where the commission is equal to or greater than 39% of the total cost of credit and 10% of the loan; or
- a contractual arrangement or tie between the lender and broker, which provided exclusive or near-exclusive rights to lenders to provide credit, except where the lender can evidence that there were visible links with a manufacturer and franchised dealer, such as where they shared a common or similar name.
The FCA is introducing some new exceptions, with arrangements to be considered fair if:
- The commission was £120 or less for agreements beginning before 1 April 2014, or £150 or less from that date. This is because the FCA considers commission amounts below those levels to be unlikely to have influenced the broker’s behaviour or consumer’s decision.
- The borrower was not charged interest (zero APR agreements).
- A tied arrangement was not operated in practice.
- The lender can prove that it was fair not to disclose one of the arrangements above, or that the consumer did not suffer any loss, for example if no better deal was available.
The FCA has also decided to introduce a new exception for high-value loans (defined as loans that are higher than 99.5% of other loans in the relevant year). The FCA considers that, due to their more bespoke nature, such loans are not suitable for a mass-market redress scheme. Customers under such loans will still be able to complain to the relevant lender and refer any lender decision to the Financial Ombudsman Service.
Redress
The majority of consumers will receive compensation based upon the FCA’s “hybrid remedy”. This constitutes the average of:
- the commission paid; and
- the estimated loss, based on a percentage discount of the interest they paid. This will be 17% for agreements from 1 April 2014 and 21% for earlier agreements (to reflect the fact that the FCA saw evidence of more harmful forms of DCA being more prevalent in earlier years).
However, compensation in hybrid remedy cases will be capped at the lowest of:
- 90% of commission plus interest;
- the total cost of credit (adjusted to account for a minimal cost offered to only 5% of the market at the time, and excluding zero APR deals); or
- the actual total cost of credit, calculated on a simpler basis.
The FCA considers that this cap will ensure no consumer is put in a better position than if they had been treated fairly.
In cases where the commission was very high (50% of the total cost of credit and 22.5% of the loan) and there was a tie or a DCA, consumers will receive the commission paid plus interest. Compensation in these cases will not be subject to the above cap.
Simple interest will be paid on compensation, based on the annual average Bank of England base rate per year plus 1%, at a minimum of 3% in any year. However, rounding will no longer be applied, and consumers will no longer be able to challenge the interest rate awarded to them.
Process
Firms will have three months from the end of the relevant implementation period to inform customers who have complained whether they are owed compensation and how much.
Firms are only required to contact consumers who have not complained if they are likely to be owed compensation. They must do so within six months from the end of the relevant implementation period (by the end of 2026 for agreements from 1 April 2014, or by the end of February 2027 for earlier agreements).
If consumers have not complained and are not contacted by their lender, they have until 31 August 2027 to make a claim. Consequently, the FCA envisages that the vast majority of claims will be resolved by January 2028.
Firms may use a range of channels to contact consumers and are no longer required to use recorded delivery. However, firms will be required to attempt contact through several channels to ensure consumer engagement.
Consumers receiving a provisional redress offer will be able to accept it immediately, rather than waiting for a final determination, in order to speed up the process. However, they will need to actively accept a redress offer within one month of receiving it before redress is paid. Firms will need to pay redress within one month of a consumer accepting the offer.
The FCA has maintained its position that brokers must comply with lenders’ requests to provide documents or information to support scheme cases within one month of the request. Information requests may increase if lenders try to gather evidence to rebut conclusions of harm arising from a tied arrangement. Brokers are also required to forward relevant complaints on to lenders, if they fall within the subject matter of the scheme. The FCA emphasises that, should brokers experience or anticipate any issues with compliance, they should engage with FCA supervision as early as possible.
Next Steps
The Policy Statement includes a dedicated chapter on how the FCA intends to oversee firms’ application of the redress scheme, and affected lenders should be mindful of the regulator’s expectations. In particular, the FCA has established a dedicated supervisory team to monitor whether firms are meeting the scheme’s rules.
Firms are required to notify the FCA within two weeks of publication of the Policy Statement whether they intend to use the implementation period(s), and provide the name and contact details of the Senior Manager responsible for scheme oversight. Six weeks after publication of the Policy Statement, firms will be required to provide a Scheme Implementation Plan to the FCA, alongside a delivery forecast. Firms wishing to start applying the scheme before the end of the relevant implementation period must notify the FCA at least 15 working days before their intended start date, to provide the regulator with appropriate visibility.
The FCA highlights that the use of rebuttals or exceptions will be subject to scrutiny, particularly among firms starting to apply the scheme before the implementation period has expired. The regulator plans to intervene if it sees emerging patterns of behaviour that raise concerns.
As the FCA is keen for redress to be dealt with effectively, and to draw a line under this issue, it expects firms to let it know promptly if they are experiencing delays or difficulties in completing the required steps under the scheme. Given the high level of interest in this matter, the FCA intends to publish periodic information about scheme implementation and progress, including volumes and redress metrics, to keep stakeholders informed going forward.