The Financial Conduct Authority (FCA) is proposing to compensate millions of consumers who may have been mis-sold car finance over a number of years. After a Supreme Court ruling in August 2025, the regulator revealed that as many as 14 million people may be eligible for refunds if they were mis-sold motor finance between 6 April 2007 and 1 November 2024 [1].

The proposed new motor finance compensation scheme [2] is the result of a multi-year investigation into how millions of motorists were overcharged as a result of hidden commissions and undisclosed links between brokers and lenders. The FCA has calculated that redress under this scheme would average £700 per agreement. Total payouts could be £8.2 billion depending on take up.

The FCA said the scheme aims to “deliver fair and consistent outcomes” for affected consumers while restoring trust in the lending market.

“Many firms broke laws and regulations by failing to disclose important information,” the FCA stated in its consultation document.

An extensive review of 32 million agreements revealed “widespread failures to adequately disclose the existence and nature of commission and contractual ties between lenders and brokers.”

14 Million Unfair Motor Loans Due Compensation Under FCA-Proposed Scheme

The regulator’s proposal comes after a Supreme Court ruling on 1 August 2025 [3], in which the court found that a lender had acted unfairly and unlawfully because of a high, non-disclosed commission paid to a broker and the non-disclosure of a contractual tie. This ruling was built on a High Court decision in December 2024 [4], confirming that such non-disclosures rendered many finance relationships “unfair” under the Consumer Credit Act.

The FCA found that where customers were on discretionary commission arrangements (DCAs), meaning that brokers could vary interest rates to gain higher commissions, there was no evidence that customers were told of these commissions. As a result, borrowers were unable to make informed decisions or shop around effectively, often paying higher interest rates than they otherwise would have.

“Inadequate disclosure means consumers were unable to make informed decisions and less likely to negotiate or shop around,” the regulator noted. “Consequently, many may have overpaid on car finance.”

This lack of transparency has led to what many now call the car finance scandal, a systemic issue that has shaken consumer confidence in the UK’s auto lending sector.

Scope and Design of the Redress Scheme

The proposed scheme would cover regulated motor finance agreements where a commission was payable by the lender to the broker. This applies to agreements entered into between 6 April 2007 and 1 November 2024, which broadly corresponds to the period when firms’ liabilities under law and regulation have been in existence.

Not all agreements will be eligible for compensation though. The FCA estimates that 14.2 million agreements, roughly 44% of all loans made since 2007, are likely to be considered unfair due to inadequate disclosure of at least one of three key features:

1. A discretionary commission arrangement (DCA)
2. High commission - defined as commission equal to or greater than 35% of the total cost of credit and 10% of the loan
3. Contractual ties - giving a lender exclusivity or a “right of first refusal” with certain brokers

These thresholds, the FCA said, “are solely for the purpose of the design of this redress scheme” and should not be interpreted across other financial markets.

The FCA has also proposed allowing lenders to rebut the presumption of unfairness in certain limited situations, for example, where they can prove that adequate disclosure was made, or where the broker selected the lowest possible rate without earning extra commission.

Why the FCA Is Acting Now

The regulator thinks there is now “sufficient legal clarity” to proceed after a series of court rulings that established how lenders and brokers were in breach of their legal duties. In essence, the FCA’s investigation revealed that most firms did not adequately disclose the existence and extent of broker commissions, resulting in borrowers being overcharged.

According to the FCA’s review of 32 million motor finance agreements:

• Many brokers were incentivised to raise interest rates to earn higher commissions.
• Consumers were rarely informed about these commissions or the nature of broker-lender relationships.
• Firms failed to comply with disclosure obligations that existed under law for nearly two decades.

As a result, millions of UK motorists have paid thousands more than they should have on finance agreements, including hire purchase (HP) and PCP claims.

The FCA also confirmed that it had consulted independent economists and statisticians to determine how much consumers may have overpaid, using a benchmark showing an average 17% adjustment in interest rates between DCA loans and standard fixed-commission loans.

How Redress Will Be Calculated

The FCA proposes a two-tier approach to calculating compensation that balances the Supreme Court’s judgement with its own analysis of consumer loss.

• Serious Cases (Johnson-type cases): Cases closely similar to the Johnson Supreme Court case where hidden contractual relationships and 50%+ of cost of credit or 22.5%+ of loan in commissions were discovered would qualify for the full commission plus interest.
• All Other Eligible Cases: Most other consumers would be entitled to receive a share of the Commission's estimate of the average overpayment and commission paid, plus interest. This blended approach should, while being fair to all, also prevent any overcompensation.

Interest would be calculated as simple interest at the Bank of England base rate +1% per year, from the date of overpayment to the date of redress. The FCA estimates this results in a weighted average interest rate of around 2.09%.

Opt-In and Opt-Out Mechanisms

To make the process accessible, the FCA plans to allow both automatic inclusion for existing complainants and opt-in options for those who haven’t yet complained.

• Consumers who already complained will be automatically included unless they choose to opt out.
• New consumers identified by lenders will be contacted within six months of the scheme launch and invited to opt in.
• Those who haven’t been contacted can request a review within one year of the scheme’s start date.

The FCA will also run a public advertising campaign to raise awareness of the scheme. Consumers who have already been compensated for similar complaints will be excluded to prevent duplicate payouts.

The FCA estimates around 85% of eligible consumers will participate, leading to redress of £8.2 billion or up to £9.7 billion in a 100% take-up scenario.

Market and Firm Impact

Despite the scale of compensation, the FCA insists that the motor finance market continues to function well. It expects “good product availability and competition” to persist even after the redress scheme.

However, the regulator acknowledged potential challenges for non-prime lenders, who have less access to funding and serve higher-risk borrowers. Some smaller lenders argue they never engaged in discretionary commission practices and therefore should not face redress liabilities.

The FCA said it will closely monitor these lenders and allow them to rebut presumptions of loss where they can prove customers wouldn’t have received a better deal elsewhere.

Complaint Handling and Deadlines

To align complaint handling with the new scheme, the FCA proposes extending the deadline for firms to issue final responses to certain motor finance complaints until 31 July 2026.

The regulator believes this extension will ensure “consistent and orderly outcomes for consumers” while minimising disruption to firms and the wider credit market.

Leasing agreements, however, are excluded since they fall outside the scope of unfair relationship legislation. Firms must start issuing final responses to leasing complaints from 5 December 2025 [5].

FCA’s Expectations of Firms

The FCA made clear that lenders, not brokers, will be responsible for administering the scheme to ensure a simpler and faster process.

Lenders are expected to:

• Identify and contact impacted consumers accurately.
• Work with brokers to gather information and determine liability.
• Ensure compensation is calculated correctly and payments are prompt.
• Avoid unnecessary delays throughout the process.

The FCA has already written to CEOs of major lenders and brokers, outlining preparatory steps they must take ahead of the scheme’s launch.

Principles Behind the Scheme

The FCA outlined five guiding principles for the scheme:

1. Simplicity for consumers – avoiding the need for individual court claims.
2. Timeliness and fairness – ensuring clear communication and consistent decisions.
3. Comprehensiveness – giving affected consumers a single route to redress.
4. Cost-effectiveness – minimising administrative burdens and legal expenses.
5. Market stability – maintaining competition and protecting market integrity.

The regulator said the redress scheme will be free to consumers, but some may still want to use authorised claims management companies or solicitors to help with paperwork and claims.  

Public Distrust and the Role of Claims Management Companies

The FCA recognises that public trust in lenders remains low. Research indicates that only 23% of the population would trust lenders to process their payouts accurately and fairly [6]. Many potential claimants are also concerned about possible lost or deleted records.

This presents real challenges:

• 57% of potential claimants have moved house since taking out finance.
• Over 8 million have lost essential paperwork or digital copies.

That’s why independent services like Reclaim247 have become vital. Reclaim247 specialises in assisting consumers in tracing old agreements and pursuing car finance refund claims even when no documents are held. Reclaim247 is FCA-authorised and solicitor-led in our processing to ensure we are accurate and fair.

Looking Ahead: What Happens Next

The FCA is seeking comments on its proposals by 18 November 2025, with plans to publish final rules and launch the scheme in early 2026. Customers could start to see payouts later this year.

The news has been broadly welcomed by consumer advocates and finance claims experts, but many have warned that it is vital to inform the public and for there to be proper regulation.

For the time being, motorists can keep up to date with the latest information on car finance claims in the UK as the consultation moves forward.

The FCA expects to pay compensation to millions of mis-sold car finance customers next year, finally offering closure after years of legal battles and consumer frustration.

Conclusion: Restoring Fairness and Accountability

The FCA's redress scheme is a game-changer for the car finance scandal that has impacted millions of people in the UK. It strikes a fair balance between consumers and firms, and it offers a clear and robust framework for compensation and reform.

While some advisers recommend waiting for the official scheme, others warn that delays or missing records could complicate claims. If you're having difficulty tracing old lenders or paperwork, remember you can rest easy knowing our team of professionals at Reclaim247, an authorised claims management company, will be handling your case.

The FCA has long since warned of "disturbing" practices in car finance and it’s encouraging to finally see something is being done about it. As the claims situation continues to develop, this action by the FCA could go some way to restoring trust in the motor finance industry and bringing long overdue justice to millions who have overpaid, through no fault of their own.

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References:

1. After a Supreme Court ruling in August 2025, the regulator revealed that as many as 14 million people may be eligible for refunds if they were mis-sold motor finance between 6 April 2007 and 1 November 2024 - https://www.fca.org.uk/news/press-releases/14m-unfair-motor-loans-compensation-proposed-scheme
2. proposed new motor finance compensation scheme - https://www.fca.org.uk/news/statements/fca-consults-motor-finance-compensation-scheme
3. Supreme Court ruling on 1 August 2025 - https://supremecourt.uk/uploads/uksc_2024_0157_0158_0159_judgment_2bb00f4f49.pdf
4. High Court decision in December 2024 - https://www.fca.org.uk/news/statements/fca-consults-motor-finance-compensation-scheme
5. Firms must start issuing final responses to leasing complaints from 5 December 2025 - https://www.fca.org.uk/news/statements/firms-given-until-december-2025-respond-motor-finance-commission-complaints
6. only 23% of the population would trust lenders to process their payouts accurately and fairly - https://www.slatergordon.co.uk/newsroom/consumers-trust-the-financial-conduct-authority-to-resolve-the-car-finance/