Financial overhaul in motor lending compensation: A revamped Financial Conduct Authority (FCA) expected in motor finance redress scheme by S&U.
The Financial Conduct Authority (FCA) has announced plans to implement an industry-wide motor finance redress scheme following a Supreme Court ruling on unfair relationships in motor finance agreements. The scheme, which aims to be fair, timely, and clear, is expected to begin compensating consumers in 2026.
The FCA's decision comes in response to firms breaking the law and FCA rules, particularly by failing to properly disclose commission arrangements paid by lenders to car dealers. The compensation scheme is intended to enable consumers to receive compensation without the need for costly claims management companies or law firms.
Factors considered unfair include the size and nature of the commission, consumer characteristics, regulatory compliance, and disclosure methods. The FCA will take these factors into account during its consultation on the redress scheme, which is expected in October 2025.
S&U, a specialist lender, and its motor finance arm Advantage Finance, have expressed confidence that they have operated fairly. The company has never used discretionary commission arrangements and expects any findings of unfair relationships to be minimal.
The total cost to the industry is estimated to range between £9 billion and £18 billion, with most individual claimants likely to receive less than £950 per agreement. The FCA is considering different approaches to redress, potentially including a de minimis threshold, and balancing the need to compensate fairly while ensuring consumers retain access to affordable motor finance.
Anthony Coombs, chair of S&U, has been critical of the FCA's handling of the motor finance debacle but feels confident they will take on the redress scheme. Coombs has also expressed optimism about the Supreme Court verdict and the proposed consultation by the FCA on redress.
Industry bosses have expressed concerns about a potential tax raid from Chancellor Rachel Reeves in the Autumn. Coombs, however, has advised Chancellor Reeves to approach new taxes with caution, considering the fragile nature of consumer confidence.
S&U recorded a near £10m hit to profit, falling to £33.6m for the financial year ending January 31 2025. Despite this financial setback, S&U remains optimistic about the motor finance redress scheme offering the UK's Financial Conduct Authority (FCA) an opportunity to implement their 'regulate for growth' rhetoric.
In the last year, 225 promotions from claims management companies (CMCs) were required to be amended or withdrawn by the FCA. Coombs has criticized CMCs for their aggressive advertising campaigns, which he considers misleading. The FCA intends to implement a redress scheme that would remove the necessity for law firms or CMCs.
Sources:
- The Guardian
- City A.M.
- Financial Times
- BBC News
- The Telegraph
- The FCA's motor finance redress scheme, beginning in 2026, aims to compensate consumers without the need for costly claims management companies or law firms, potentially lowering the costs associated with investing in the claims management business.
- In the UK's economy, the total cost to the motor finance industry due to the FCA's redress scheme is estimated to range between £9 billion and £18 billion, which could impact banking institutions that provide funding to the said industry.
- The motor finance redress scheme is expected to significantly affect businesses, especially those involved in the automotive sector, as most individual claimants are likely to receive less than £950 per agreement.
- Industry bosses have conveyed their apprehensions about a potential tax raid from Chancellor Rachel Reeves, but Anthony Coombs, chair of S&U, advises caution in implementing new taxes, considering the fragile nature of consumer confidence and the potential impact on businesses, especially in the finance and banking sectors.
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