Why a car finance redress scheme may not benefit all consumers

The Financial Conduct Authority’s (FCA) proposed motor finance consumer redress scheme is intended to make compensation more accessible for people harmed by car finance mis-selling. This is a serious and necessary intervention in a market in which the regulator's data indicates that 32.5 million motor finance agreements were entered into between 6 April 2007 and 1 November 2024. Having analysed 31.86 million of them, the FCA estimates that compensation may be payable on 14.2 million of those agreements.

The FCA’s proposals focus on three areas where harm may have arisen. These are motor finance agreements involving:

• a discretionary commission arrangement (DCA), which allowed car dealers to enhance their commission by charging the consumer a higher interest rate without adequate disclosure;
• high commission, which the FCA defines in Consultation Paper CP25/27, Motor Finance Consumer Redress Scheme, as commission that is 35% or more of the total cost of credit and 10% or more of the total cost of the loan; or
• a contractual tie, where a lender had exclusivity or a right of first refusal to provide motor finance.

However, a redress scheme does not necessarily deliver the same outcomes as a claimant pursuing a complaint through their lender's complaints process, by escalating via the Financial Ombudsman Service (FOS), or by bringing a claim in court. A redress scheme may trade individual scrutiny for speed and scale. This is a practical compromise, but one that may leave some consumers with a lower compensation award, less control, and more risk than they might expect when they hear the words “industry-wide redress” and statements from the regulator about putting things right.

The FCA’s proposed redress scheme is a significant regulatory intervention, but several factors suggest it may not deliver favourable outcomes for all claimants.

Redress schemes can standardise compensation downwards

Redress schemes are designed to process large volumes of cases consistently and to deliver compensation to as many eligible claimants as possible. In its press release announcing its redress scheme proposals, the FCA noted that its proposed rules may result in some people missing out on compensation within the scheme, even where their lenders did not adequately disclose a commission paid to brokers. This may occur where an agreement does not fall within the three parameters listed above. Consumers in this position may fall outside the scheme. However, they may still be able to pursue a complaint through their lender and, if appropriate, refer the complaint to the FOS or bring a claim in court. The practical scope of these routes will depend on the final redress rules and the facts of each case.

In addition to the regulator’s rule-based eligibility, the methodology for calculating the redress itself can compress outcomes. For example, notes 3.28 and 3.29 in CP25/27 state the following:

3.28 Our analysis of approximately 230,000 agreements between January 2019 and January 2021 finds that APRs on loans with two types of DCAs – reducing difference-in-charges (DiC) or scaled commission models (these models are described in the Diagnostic Report) – were typically 20–24% higher than comparable flat fee loans.

3.29 In other words, borrowing costs on loans with a flat fee commission structure were on average 17% lower than comparable loans with reducing DiC or scaled commission models. This is broadly consistent with other analysis we have carried out, which found that, following our 2021 ban on DCAs, average APRs fell by around 20% compared to a control group of personal loans, indicating that DCAs were driving higher costs for consumers before the ban. This is also likely to be a lower bound to the losses faced by consumers as it looks at how much more consumers paid than they would have done in a transparent market and not the losses involved with receiving an unsuitable product or the erosion of trust and confidence.

The FCA’s modelling is intended to estimate what a consumer would have paid in a hypothetical 'more transparent' market; however, consumer advocacy groups, including Consumer Voice, have challenged whether this captures the full extent of historical harm, arguing that the regulator’s modelling risks significantly under-compensating consumers.

The overall practical implication is that whilst a formal redress scheme can be beneficial for access, it can also function as a cap on what many consumers receive, especially when the rules narrow who is eligible or ‘within scope’ and how loss is to be quantified.

Compensatory interest is materially lower than many claimants expect

As the car finance mis-selling controversy has unfolded, the focus has primarily been on refunds for overpaid interest or commission-related costs, particularly as the FCA has reduced its redress projections over time. The APPG on Fair Banking's Car Finance Scandal: Assessing Redress report, published on 3 November 2025, which accused the FCA of 'nakedly taking the side of lenders,' highlighted these figures. The FCA initially estimated that £1,100 redress may be payable per mis-sold agreement, before later reducing this to ‘less than £950’ following the Supreme Court’s judgment in Johnson, Wrench and Hopcraft, which was handed down on 1 August 2025, and finally to £700 in its redress proposals.

Significant controversy also surrounds the FCA's proposed level of compensatory interest, which, according to a November 2025 report in The Guardian, will see consumers miss out on up to £4 billion. Often, interest added to compensation awards makes a substantial difference to the total received and would have been likely to do so in motor finance claims, particularly for older agreements.

However, under the regulator’s proposals, compensatory interest will use the Bank of England Base Rate plus one percentage point, calculated on a simple interest basis, with the FCA estimating a weighted average of 2.09% in Table 29 within Consumer Redress Scheme for Motor Finance Technical Annex 1: Data, Analysis of Loss and Liability and Cost Methodologies. This will result in compensatory interest within the redress scheme being paid at a far lower rate than the 8% figure commonly referenced in some compensation contexts (where applicable), potentially significantly reducing the real-terms value of redress for millions of consumers.

This aspect of the proposals is contentious, because such a rate may neither fully restore consumers to the position they would have been in had the relevant commission features been appropriately disclosed and priced, nor address the damage that historical mis-selling has done to the UK’s ‘real economy.’

Some consumers may be eligible for an enhanced compensatory interest rate if they can demonstrate that higher motor finance payments left them without funds they would otherwise have had, and that this caused them to borrow elsewhere at a higher rate. Assessing whether this applies is one reason some consumers may find it beneficial to use a solicitor to bring a car finance claim.

The ‘lender-led’ nature of the scheme creates a verification problem

Governance is a significant concern with mass redress events. Questions around who calculates redress, who explains compensation calculations, and their material interests and incentives in the context of a scheme are all vital.

Under the FCA’s proposals, lenders will be:

• responsible for identifying and contacting affected customers;
• applying the redress calculation methodology;
• communicating the outcome to consumers; and
• making redress payments where they are due.

This creates an information asymmetry: the lender holds the datasets and modelling assumptions, while the consumer is asked to assess and accept the outcome with limited information.

Even with robust regulatory oversight, these ‘lender-led’ aspects of the scheme mean consumers will, by default, be in a reactive position, reviewing lenders’ assessments of redress calculations after the event.

This is crucial and matters greatly, because:

• The redress calculation methodology is complex and technical. Many consumers who are contacted by their lender(s) will have no way to verify which data were used, whether it is correct, or whether any assumptions or estimates applied were appropriate and accurate.
• Significant data gaps almost certainly exist. For agreements that expired six or more years ago, records may be destroyed or incomplete, which can affect eligibility and calculations. Separately, where consumers do not know who financed their agreement, they may struggle to identify the relevant lender(s) and engage with the scheme in time. In addition, a scheme built for scale, as this one is, will be heavily reliant in some cases on estimates and reconstructed data in place of granular evidence, potentially significantly disadvantaging some consumers in individual cases.

Finally, because the party alleged to have mis-sold the motor finance is now the party performing the redress calculation, the burden lies solely with the consumer to challenge a decision or calculation they may not understand and may not have the paperwork to contest effectively. The outcome here, which the regulator itself admits could happen, is that many people may get ‘something’ but not necessarily a compensation award that reflects their actual loss.

Consumers may still need to act to receive their compensation

Under the FCA’s redress proposals:

• claimants with existing complaints will be contacted by their lender within three months of the start of the scheme and automatically be included in it unless they opt out; and
• lenders will contact consumers who do not have an existing complaint within six months to ask whether they would like to opt in to the scheme or not.

In practice, this creates two different consumer journeys: opt-out for those who have already complained, and opt-in for many who have not.

Crucially, this also means that consumers who have not raised a complaint already will have a deadline to respond to their lender(s) and may need to contact their lender(s) themselves if they do not receive contact within six months of the start of the scheme. As the regulator’s redress scheme will have clear timelines in the name of efficiency, for those who have not raised a complaint, this creates an obvious risk and the prospect of receiving no compensation at all. Consumers in this situation should consider raising a complaint with their lender now, either directly or through a solicitor, to reduce these risks.

The opt-in portion of the redress scheme also creates predictable risk groups:

• those who have moved address in the past six years or since the conclusion of their agreement(s);
• people who have changed names or have a fragmented credit history;
• consumers with agreements across multiple lenders; and
• anyone with older agreements where there may be doubt whether the lender still holds their records.

Consumer Voice has additionally identified older consumers, low-income households, and those who cannot remember who financed their car finance agreement(s) as being at risk, and has called for as much of the redress scheme as possible to be opt-out to reduce the risk of these groups missing out.

The FCA’s Financial Services Consumer Panel has also raised concerns about access to the FOS, including whether consumers should have 15 months to refer a complaint to the Ombudsman after receiving a final response, given the time they may need to understand the scheme and decide whether to participate or not. The regulator announced in December 2025 that its motor finance complaint handling pause will end on 31 May 2026.

A car finance redress scheme may not benefit consumers if it exists but does not pay them, or if it directly or indirectly impedes other routes to redress.

Even if redress is due, consumers may not receive the full amount

The FCA’s proposals would allow lenders, in some circumstances, to set off redress against arrears or an outstanding balance on an existing motor finance agreement or other regulated consumer credit agreements they have with the consumer.

Consequently, some consumers may receive no, or a reduced, cash payment, even where redress is calculated to be due. Where set-off is applied, it may reduce the cash paid to the consumer. However, it may also reduce the consumer's outstanding indebtedness.

Accepting redress may close off other routes, including litigation

The regulator’s proposals would allow lenders to offer motor finance redress under ‘full and final’ settlement conditions, which may prevent consumers from claiming a higher compensation award if they later pursue a claim outside the scheme, depending on the terms accepted. The APPG’s November 2025 report stated that some consumers may receive double the amount they would receive from the redress scheme by pursuing their claim in court.

Notably, the FCA's proposed redress scheme will address only the mis-selling of motor finance. That means that even if consumers accept a redress offer that is lower than their loss, they may still be able to pursue a claim for irresponsible lending or mis-sold GAP insurance later, should they wish to do so, subject to merits and any settlement terms accepted.

Consumers should consider taking advice before accepting any full and final settlement redress offer, particularly if they believe their losses may exceed the scheme methodology.

Redress schemes can be a catalyst for scams

High-profile, mass redress events attract opportunistic behaviour. As the landscape around motor finance mis-selling has evolved since the FCA commenced its formal investigation on 11 January 2024, both regulatory bodies and consumer groups have had to repeatedly warn consumers about claims and compensation scams that use official-sounding language to obtain personal data or collect upfront fees fraudulently.

With the publication of the FCA's final redress rules and the commencement of the scheme likely to attract significant publicity, there is a considerable risk that scammers will target vulnerable groups, particularly those identified by Consumer Voice as also being at risk of missing out unless more of the scheme is run on an opt-out basis.

Register your car finance claim with Harcus Parker

If you had motor finance between 6 April 2007 and 1 November 2024 and are concerned that your lender may not be able to contact you, or that you may not receive the compensation you may be eligible for via the regulator’s proposed redress scheme, start gathering your paperwork now.

If you are struggling to find your paperwork or do not remember who your lenders were, or wish to be professionally represented in your motor finance claim, you can instruct us here.