The Financial Conduct Authority’s proposed motor finance redress scheme – covering an estimated 14.2 million car finance agreements taken out between 6 April 2007 and 1 November 2024, with average compensation of around £700 per agreement expected to be paid to consumers – has triggered a significant backlash from lenders, who are facing payouts totalling billions.

Lenders have long been sounding the alarm, but the volume increased significantly after the Supreme Court delivered its verdict in the Johnson, Wrench and Hopcraft test cases on 1 August 2025, after which they began warning that car finance payouts ‘will harm Britain’s prospects.’ Following the regulator’s publication of its redress proposals, Lloyds Banking Group CEO Charlie Nunn further claimed that car finance claims are damaging Britain and would deter investment coming into the country. Lenders and trade bodies have since continued to set out a series of technical and legal arguments designed to question the legitimacy of the FCA’s redress proposals and, in the longer-term, to minimise their own liabilities.

The main lines of defence used by lenders have certainly received significant coverage, but the arguments are far weaker than they may initially appear, or the coverage would suggest, when considered alongside the regulator’s findings, the August 2025 Supreme Court decision, and Financial Ombudsman Service (FOS) decisions around motor finance mis-selling.

Defence #1: ‘We complied with the rules at the time’

A central plank of the industry’s defence is that lenders offering car finance across the period covered by the FCA’s proposed redress scheme were operating within the regulatory framework and complied with the rules as they understood them in force at the time. This argument applies both to agreements involving discretionary commission arrangements (DCAs) and those with non-discretionary hidden or excessive commissions, with lenders and industry bodies claiming that the regulator is now applying new standards of ‘fairness’ retrospectively.

The Finance & Leasing Association (FLA) has argued that, between 2007 and 2014, before the FCA first published its Consumer Credit Sourcebook (CONC), there were ‘no specific regulatory rules at all about commission disclosure.’ The FLA asserts that some car dealers acting as motor finance brokers used DCAs to lower the interest rate they offered customers in order to be as competitive as possible. Consequently, the FLA says that it believes that the regulator’s proposed redress scheme risks overreaching by providing compensation to customers who have not suffered loss.

What the FCA, FOS and the courts say

The regulator’s findings, alongside historical FOS decisions and the August 2025 Supreme Court verdict, undermine these arguments.

In its Motor finance consumer redress scheme consultation paper (CP25/27), the FCA states that its ‘extensive review’ of data from 32 million car finance agreements found that ‘many firms broke laws and regulations in force at the time by failing to disclose important information’; and the regulator’s statement on the redress scheme noted that, of the agreements it reviewed involving a DCA, there was no evidence that the customer had been told about the DCA.

The FCA is not alleging that lenders broke the rules as they stand today, but that many lenders breached the law and rules at the time the agreements were made, including the unfair relationship provisions outlined in Section 140A of the Consumer Credit Act (CCA) 1974.

In addition, the two FOS decisions that were partially responsible for the regulator launching its formal investigation into the motor finance space in January 2024 reinforce this.

• In DRN-4188284, concerning a Black Horse agreement, the Ombudsman found that linking a broker’s discretionary commission to the interest rate created an unfair relationship under the CCA and ‘had acted contrary to the guidance at CONC 4.5.2G and failed to have due regard to Mrs Y’s interests and treat her fairly as required by Principle 6 of the FCA’s Principles for Businesses.’
• In DRN-4326581, involving Clydesdale Financial Services trading as Barclays Partner Finance, the Ombudsman again ruled that there was an unfair relationship and concluded that both the lender and the broker had failed to disclose adequately the DCA, breaching the FCA’s rules as well as CONC 4.5.2G and Principle 6.

Furthermore, the FCA’s July 2020 Policy Statement PS20/8, Motor finance discretionary commission models and consumer credit commission disclosure, in which it announced it was banning DCAs from 28 January 2021, was itself based on the regulator’s prior work that identified harms in existing practices. In its earlier Consultation Paper in which the FCA proposed banning DCAs (CP19/28, Motor finance discretionary commission models and consumer credit commission disclosure), the regulator estimated that, on a typical motor finance agreement of £10,000 over four years, a DCA could add approximately £1,100 in extra interest, and that banning DCAs could save consumers around £165 million a year. (Note that the redress scheme proposed in the more recently published consultation paper would deliver compensation at a lower level than this.)

These findings and actions were based on rules and legal duties already in force.

Finally, the Supreme Court’s August 2025 rulings in Johnson, Wrench and Hopcraft confirmed that both undisclosed excessive commissions and undisclosed contractual ties between brokers and lenders could render the borrower-lender relationship unfair under the CCA.

Far from moving the goalposts, the FCA’s findings and its redress scheme proposals are built on longstanding, established statutory provisions on unfair relationships and rules that many firms should have been following at the time but were not.

Defence #2: ‘Customers got the car they wanted and knew what they were paying’

Some lenders argue that customers:

• received the vehicle they wanted;
• understood the finance payments; and
• in some cases, benefited from competitive interest rates, a point echoed in the FLA’s defence.

At a May 2025 appearance before Parliament’s Treasury Select Committee, Nunn stated that Lloyds Banking Group ‘don’t have evidence of harm, or that we’ve broken regulation’ in its motor finance activities.

The underlying suggestion from such arguments is that consumers knew broadly what they were paying and were content with the deal, so any disclosure failings were technical rather than substantive. We explore this idea further in our examination of why car finance mis-selling is not a victimless technicality.

Why ‘no evidence of harm’ is a difficult argument to sustain

In its statement on its redress scheme proposals, the regulator notes that: ‘Inadequate disclosure means consumers were unable to make informed decisions and less likely to negotiate or shop around. Consequently, many may have overpaid on car finance.’

This is supported by the FCA’s earlier findings that a customer may have paid over £1,100 in extra interest due to a DCA, albeit that the regulator’s redress scheme consultation paper CP25/27 estimates the average redress per motor finance agreement with an inadequate disclosure of a DCA will now be £665.62.

The FOS decisions already highlighted also provide concrete evidence of harm:

• In the Black Horse case, DRN-4188284, the customer’s interest rate was 10.5% APR, with a flat interest rate of 5.5%. The Ombudsman found that a discretionary commission of £1,146.67 was paid to the broker and that the lender would have been prepared to lend to the customer at a flat interest rate of 2.49%, with the broker receiving any amount charged over that in commission. In this case, the broker selected the highest flat interest rate permitted and did not disclose that Black Horse would pay commission.
• Similarly, in the Barclays Partner Finance case, DRN-4326581, the Ombudsman found that the customer could have received a flat interest rate as low as 2.68%, but the broker selected a rate of 4.67% and subsequently received a £1,326.60 discretionary commission payment.

When these figures are considered alongside the FCA’s estimates that 14.2 million agreements, approximately 44% of the market over the relevant period, were unfair due to the inadequate disclosure of a DCA, high commission, or a contractual tie, it is difficult to conclude that there is ‘no evidence of harm’ or simply to state dismissively that customers ‘got the car they wanted’. The issue is not whether the customers liked their cars but whether they paid more for their finance than they should have.

Defence #3: ‘Customers suffered no actual financial loss’

A related defence to the previous one is that many consumers suffered no real financial loss, either because they could not have obtained a cheaper deal elsewhere or the headline rate they paid was still competitive versus other lenders.

These arguments are sharpened by comments such as those made by Nunn to the Treasury Select Committee and the FLA’s position that the regulator’s proposals may compensate customers who have not suffered loss and that the redress scheme risks over-compensation and will therefore undermine confidence.

Why the ‘no loss’ argument does not work

First, the FCA’s redress calculations are explicitly based on modelling the financial impact of undisclosed commission, not on a blanket assumption that everyone who had a car finance agreement between 6 April 2007 and 1 November 2024 should receive compensation.

In its statement announcing its redress scheme proposals, the regulator outlines that agreements will only be considered unfair if they involve one or more of the following:

• a DCA;
• high commission, defined as where the commission is equal to or greater than 35% of the total cost of credit and 10% of the loan amount; or
• a contractual tie.

The FCA explicitly states that it chose the 35%/10% thresholds as its analysis indicates this is the point at which ‘borrowing costs may have been more strongly affected by the commission’ and customers are more likely to have looked for an alternative financing solution had they been aware of it.

This highlights that the regulator has been conscious of ‘over-compensation’ or people receiving compensation they are not eligible to receive and is aiming to focus specifically on where substantial harm has occurred. In addition, the FCA also consistently notes that most car finance agreements taken out between 6 April 2007 and 1 November 2024 will not be eligible for compensation.

Second, the legally relevant question when considering whether there is an unfair relationship between the borrower and lender as defined in the CCA is not whether a hypothetical identical loan would have been available without commission or otherwise cheaper elsewhere. The courts and FOS analyse:

• whether the borrower-lender relationship was rendered unfair by the non-disclosure of a DCA or other material commissions and ties; and
• whether the customer likely paid more than they would have done had the commission been adequately disclosed or structured.

We have already seen in the two FOS decisions that both lenders would have lent at a lower rate, directly contradicting the notion that a better deal was not or would not have been available.

Finally, even where a borrower might still have taken out car finance with the same lender, the law and the regulator’s rules require both transparent disclosure of conflicts of interest and fair treatment of consumers, not simply a vaguely defined ‘broadly competitive APR.’

The ‘no loss’ argument conflates benchmarking with compliance and fairness; a finance agreement can be unfair—and overpriced relative to what the same lender could and should have offered—even if the headline rate looks similar to the rest of the market.

Defence #4: ‘The FCA is moving the goalposts and acting retrospectively’

Similarly to the first defence, some have said that the FCA’s proposed redress scheme amounts to retrospective legislation, an argument first put by Phoenix Group CEO Andy Briggs in front of the House of Lords Financial Services Regulation Committee on 15 January 2025.

Lenders have also indicated a belief that the regulator is going beyond the Supreme Court’s decision by casting its redress scheme too broadly, with Santander UK Chief Executive Mike Regnier even calling on the UK Government to intervene and change the FCA’s redress proposals.

The FCA’s redress proposals are not retrospective

The FCA’s statement covering its redress proposals and consultation states: ‘The Financial Ombudsman and courts consider complaints from 6 April 2007 and therefore firms’ liabilities arising from their breaches of the law and regulation already exist. The end date is based on when we know firms moved to more transparent practices following the Court of Appeal judgment on 24th October 2024 that was subsequently appealed to the Supreme Court.’

It is clear that lenders’ underlying liabilities arise from their breaches of the CCA and the regulatory rules that were in place at the time. Rather than acting retrospectively, the FCA’s redress scheme is beneficial as it acts in place of what would otherwise be a heavily fragmented landscape of complaints to firms, the FOS, and courts across the country. Implementing a redress scheme delivers a structured and time-limited redress mechanism, which should deliver consistency and ensure as many affected consumers as possible receive their compensation.

The regulator’s earlier work also undermines the moving-the-goalposts critique; in Policy Statement PS20/8, which announced that the DCA ban would come into effect on 28 January 2021, the FCA explicitly stated that many firms were not compliant with the then-existing rules on commissions and commission disclosure.

Defence #5: ‘The country needs a functioning car finance market’

Beyond the legal arguments, lenders have repeatedly warned that having to pay redress will deliver a broad range of negative economic consequences, including:

• undermining the car finance market and disrupting its functioning;
• reducing the appetite of banks to lend;
• affecting the availability of credit and specifically car finance;
• deterring investment in the UK; and
• harming jobs and growth.

What MPs and the FCA’s own analysis say about market functioning

In a report, Car Finance Scandal: Assessing Redress, published on 3 November 2025, the All-Party Parliamentary Group (APPG) on Fair Banking accused lenders of ‘doom-mongering’ in making such statements.

However, the real rebuttal of this point comes in the regulator’s own impact assessments and statements, which suggest that restoring fairness is compatible with and may even support a properly functioning car finance market.

Returning once more to Policy Statement PS20/8, the regulator stated that it ‘did not believe that our proposals would precipitate firms exiting the market,’ and even estimated that lenders may see an increased volume of car finance sales, owing to the lower cost and improved accessibility of the product. The FCA also pointed out in its statement announcing the redress scheme that this approach was the ‘best way’ to ensure the UK has a ‘well-functioning and competitive motor finance market.’

Additionally, car finance lenders have long been setting aside provisions in anticipation of redress costs. Whilst these costs are not insignificant, they must be analysed in the context of a well-capitalised banking sector, where annual profits dwarf the sums to be repaid. It should also be remembered that these repayments are money that lenders should never have ‘earned’ in the first place, and that whatever happens, the lenders will end up not compensating a significant proportion of their customers.

Ultimately, a market cannot be said to be functional if it is reliant on non-disclosure of practices to its customers or the charging of excessive commissions. Nor is it simply one where credit is available at any price. A functioning market sees:

• products transparently sold;
• conflicts of interest managed and disclosed;
• customers with the choice to shop around for alternative options; and
• those same customers able to trust that they are not being systematically overcharged.

Based on these definitions, the FCA, the FOS, and the courts have all concluded that large parts of the car finance market were not historically functioning properly.

Why lenders’ arguments matter for your car finance claim

You may be eligible for car finance mis-selling compensation if you took out a motor finance agreement between 6 April 2007 and 1 November 2024, and your agreement involved:

• an undisclosed DCA;
• excessive, undisclosed commission; and/or
• a tied agreement, where your dealer effectively only had one lender or finance product to offer, despite presenting themselves as ‘independent.’

Lenders’ arguments in their own defence are likely to shape how they approach complaints, interpret the regulator’s rules, calculate compensation, and may even lead to them attempting to bring a judicial review against the FCA’s redress scheme.

In this context, although the regulator’s redress scheme will allow you to claim car finance compensation yourself at no cost, it would be understandable if you were also questioning whether you can trust the lenders who mis-sold your agreement and overcharged you for years to act in your best interests now.

That is one of many compelling reasons why you may wish to consider instructing a solicitor to bring your car finance claim on your behalf.

If you are ready to register your car finance claim, you can do so with Harcus Parker here.