Financial reform under motor loan redress program should reflect a transformed Financial Conduct Authority (FCA)
The Financial Conduct Authority (FCA) has announced plans to consult on a motor finance redress scheme by early October 2025, with the aim of operationalising the scheme in 2026. This development follows a landmark Supreme Court ruling in August 2025 that found certain commission arrangements between lenders and dealers to be unfair under the Consumer Credit Act, making them unlawful in specific cases.
The redress scheme, if implemented, could cover mis-sold consumer loans dating back to 2007. The FCA estimates that the potential compensation value could range between £9 billion and £18 billion, with an average payout of approximately £950 per agreement. The scheme is expected to provide clarity, consistency, and a simpler route to compensation for consumers compared to complaint-led approaches that rely heavily on claims management companies (CMCs).
Anthony Coombs, the chair of S&U, has been a vocal critic of the FCA's handling of the motor finance debacle. Last November, Coombs stated in the House of Lords that the FCA "is not fit for purpose" from a motor finance perspective. However, Coombs expressed significant optimism about the Supreme Court verdict and the FCA's proposed motor finance redress scheme.
The FCA intends to remove the necessity for law firms or CMCs in the redress scheme, aiming to streamline the process and reduce costs for consumers. The specialist lender S&U is optimistic about the motor finance redress scheme, viewing it as an opportunity for the FCA to implement its 'regulate for growth' policy.
However, there is political and parliamentary pressure to scale back the scheme. Members of the House of Lords Financial Services Regulation Committee argue the FCA’s planned scope is too broad, risking delays, financial strain on lenders, and logistical difficulties due to the long retrospective period (back to 2007). They advocate for a more targeted approach with a claims window limited to the last six years in line with the Consumer Credit Act's usual limitation period.
The impact on the UK motor finance industry is significant. Major lenders like Lloyds Banking Group have already set aside over £1 billion to cover potential compensation. The ongoing development represents one of the largest compensation exercises in UK consumer finance and will materially influence future industry practices and consumer protections.
Industry bosses have sounded the alarm about a potential tax raid from Chancellor Rachel Reeves in the Autumn. Coombs advised Chancellor Rachel Reeves to step carefully and avoid new taxes due to the fragile nature of consumer confidence. Coombs also criticized the aggressive advertising campaigns of CMCs, describing them as "ghastly."
The FCA's redress scheme is expected to be a key mechanism to resolve historic mis-selling issues and restore consumer trust, while also forcing finance providers to enhance transparency and compliance. The scheme, if successful, could mark a turning point in the UK's consumer finance industry, ushering in a new era of fairness, transparency, and regulatory oversight.
References:
- The Guardian
- BBC News
- FTAdviser
- City A.M.
- Financial Times
- The motor finance redress scheme, if operational, could significantly impact the UK's economy and finance industry, affecting sectors like banking, banking-and-insurance, and fintech.
- The redress scheme is expected to reshape the personal-finance landscape, with implications for wealth-management and the investing public.
- The FCA's initiative could lead to reforms in the motor industry, requiring companies to improve their practices and adhere more closely to consumer protection regulations.
- Taxes might become a topic of concern within the industry, with calls for caution to prevent financial strain on lenders during the compensation period and beyond.
- The ongoing ambitions of the FCA, as demonstrated by the redress scheme, reaffirm their commitment to regulating the industry for growth and promoting fairness.
- The proposed redress scheme, combined with renewed regulatory scrutiny, may raise questions about the role of intermediaries like law firms and claims management companies (CMCs) in consumer finance.
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