The UK government fosters reforms to the Financial Ombudsman Service (FOS) as part of the measures aimed at addressing the escalating car finance scandal which has seen a tidal wave of consumer complaints and the potential for billions of pounds in compensation claims.

The main issues at stake are complex and highly contentious, and one of them is the discretionary commission arrangements. In what is shaping up to be one of the most significant financial mis-selling scandals in recent memory, the car finance sector is facing mounting scrutiny from the Financial Conduct Authority (FCA), policymakers, and consumers alike.

A Review of the FOS: Political Pressure Builds

Behind closed doors, the Conservatives are looking at how they can curb the powers of the FOS by giving the FCA the final say on the way complaints are handled. The plans have been put under review after backbench MPs, industry groups and lenders have repeatedly raised political pressure on the Government over the role the Ombudsman has in awarding redress to consumers.

Critics of the FOS scheme have argued that it leaves firms exposed to what can be an arbitrary or erratic awards process. Decisions are binding on firms, but not on consumers. It has become an important part of the car finance compensation journey with thousands of complaints having been submitted to it over historic lending practices, which are often to do with hidden or undisclosed commissions.

The government’s proposals, which are said to be under discussion at senior levels of the Treasury, would allow businesses to appeal against decisions made by the FOS. The final say on contested matters would then rest with the FCA — the statutory regulator — which would offer firms a more structured and arguably more consistent legal framework.

The Role of the FCA in the Car Finance Scandal

The FCA has been central in responding to the car finance scandal, which primarily concerns the practice of discretionary commission arrangements (DCAs). These arrangements allowed car dealerships and brokers to adjust interest rates on motor finance agreements in exchange for higher commissions from lenders, without always disclosing this practice to consumers.

DCAs were banned by the FCA in 2021 following a supervisory review which highlighted evident consumer harm. In its review, the regulator found that consumers were frequently being charged higher interest rates not based on credit risk but rather to maximise dealer commissions.

“We found that discretionary commission models have led to higher finance costs for consumers.”

Since the ban, the regulator has received a deluge of complaints from motorists who believe they were overcharged. The scale of potential redress is enormous. Analysts estimate that total car loan compensation could reach as much as £13 billion, though some legal groups suggest the figure might be closer to £40 billion if a formal redress scheme is introduced.

In January 2024, the FCA suspended the usual one complaint-one business approach to car finance cases that involve commission. This was extended again in June 2025, to allow the regulator to consider this issue further and consult on a possible sector-wide remedy. The FCA said in a statement:

“We are carefully considering the information we have received and whether redress may be required. It is important to get this right.”

Concerns Over the FOS’s Jurisdiction

Thousands of car finance complaints have been sent to the FOS during the FCA’s pause. Lenders have been starting to voice their concerns. Industry chiefs claim that Ombudsman decisions (usually based on individual circumstances) don’t have the consistency of regulator direction. They could also lead to ‘inconsistent’ payouts.

These concerns have made their way to the Treasury, where discussions are underway about whether the Ombudsman should continue to have final authority in cases of financial misconduct, particularly those as broad and systemic as the car finance scandal.

The idea of giving the FCA final decision-making powers is seen by some as a way to “re-balance” the system — offering firms the right to challenge compensation awards while still safeguarding consumers’ rights to fair treatment.

Implications for Consumers

While internal policy discussions unfold, consumers are advised to continue submitting complaints to their finance providers and, if necessary, to escalate cases to the FOS. For those unsure of how to claim mis-sold car finance, numerous consumer rights organisations and legal firms are offering free advice and support.

Customers are advised to look into their past motor finance deals. This is especially applicable if the arrangement was brokered through dealers or brokers, and occurred between 2007 and 2021. Any paperwork that mentions DCAs or inflated interest rates may aid customers in making a claim for car finance compensation.

The FCA and FOS have both been vocal in recent times about treating customers fairly. The FOS website includes detailed guidance for individuals seeking redress related to car finance complaints. Meanwhile, the FCA continues to assess whether a redress scheme akin to the one implemented after the PPI scandal might be warranted.

Industry Prepares for a Reckoning

Lloyds Banking Group and Close Brothers are among the larger banks and building societies that have already set aside funds to meet claims for car finance compensation. Uncertainty remains over how much it could cost the sector if a redress scheme is announced as expected later this year.

In the meantime, the Supreme Court is expected to hand down a judgement over the coming weeks in a test case brought by car buyers over whether car dealers owed a fiduciary duty to their customers to disclose commission arrangements and, if so, whether the buyers were successful in their complaints.

The Path Forward

For now, consumers are encouraged to act. The FCA’s current pause on complaint responses does not prevent individuals from lodging their concerns. Rather, it gives both the FCA and financial firms time to gather the necessary data and prepare for what may be one of the largest compensation exercises in UK financial history.