The FCA’s recently proposed consultation paper containing draft rules for a motor finance consumer redress scheme, published on 7 October 2025 (Consultation Paper), has attracted considerable scrutiny from across the industry as well as from consumer groups. Stakeholders have also voiced a range of concerns, notably the legal basis and proposed time period for the scheme, the rate of compensatory interest, the operationalisation of the scheme, the legal basis for the criteria used to make customers eligible for redress and the short timeframe for the consultation (which the FCA extended to 12 December in response), all of which present significant challenges for firms seeking to respond effectively.
It is important that firms should monitor these developments and stay informed about the concerns raised on the proposed scheme in the run up to the FCA’s final policy and implementation of the scheme. Although the FCA states in the Consultation Paper that the parameters it sets in the Scheme for what amounts to a breach of s140A of the Consumer Credit Act 1974 (CCA) (unfair relationships) are only intended to apply to those within this scheme, it is easy to see how claimants might be motivated to bring claims outside the scheme which have the same features, and so the FCA’s proposals may unintentionally have wider ramifications.
Concerns raised by parliamentary committees
Various parliamentary committees have been raising concerns about the proposed redress scheme. The House of Lords Financial Services Regulation Committee has recently scrutinised the FCA’s handling of the scheme including its delay in acting, the clarity and enforcement of its rules, and the fairness of extending claims back to 2007. They argued that the extended timescale primarily benefited claims management companies (CMCs).
The scheme was further criticised by the All-Party Parliamentary Group (APPG) on Fair Banking in their recently published report titled ‘Car Finance Scandal: Assessing Redress’. The report finds that the FCA’s redress scheme is flawed and lacks transparency. In its view the process for determining eligibility and compensation is complex and unfair in that it blends different entitlements and awards too little compensatory interest.
Concerns raised by industry stakeholders
Industry bodies have also raised concerns about the very wide test the scheme applies for compensation eligibility, on the basis that the scheme is likely to compensate customers who suffered no loss – effectively ignoring the requirement for proportionality on the part of the regulator and therefore impacting growth and competition in the motor finance sector. This concern also casts doubt on whether the test the FCA has created, which is purported to be based on customers being able to make out a claim under s140A CCA in court, is lawful, since schemes under s404 of the Financial Services and Markets Act 2000 (FSMA) can only operate to make redress more effective where consumers suffer a loss which they would be able obtain damages in court for. Similarly, the legal basis for the FCA’s power (at least without Treasury amendments to statute) to apply the Scheme back to 2007 is doubted by many. Concerns were also raised about the challenges of gathering evidence and missing documentation, particularly noting that the presumption of fault against lenders in cases where data or documents are unavailable, particularly given the long time period for the Scheme, represents a significant departure from the FCA’s previous approach and the legal requirements that apply to lenders in relation to document retention.
The FCA has recently published a statement providing a progress update on its consultation, which also discussed the issues highlighted by stakeholders from the consultation feedback to date. These include the following: the time period for the scheme; the rate of compensatory interest; how independent mechanisms will ensure confidence (including the role of the Financial Ombudsman Service and ideas for alternative approaches); how smaller firms or those with a low number of agreements eligible for redress can operate the scheme in a cost-effective way; how to prevent fraud; what the relationship between motor manufacturers and their captive lenders means for commercial ties (commercial tie being one of the three factors said to be “unfair” and resulting in redress). The FCA has also acknowledged concerns over the speed at which firms will be able to prepare for and implement the Scheme – the current proposals envisage 3 months from the scheme commencement to contacting customer and 6 months after that for sending out redress.
FCA response and next steps
It is welcome news for the industry that the FCA has acknowledged the feedback to date and decided to extend the consultation deadline until 5pm on 12 December. It has also clarified that it still expects to publish final rules in early 2026, but that will now likely be either February or March.
Firms should monitor the above developments including the FCA’s announcements and guidance published in relation to the redress scheme, which include the FCA’s recently launched data room to help respondents understand its analysis of loss and an FAQs page setting out the responses to questions received during engagement with stakeholders. Firms should take note of the concerns raised by the industry so far and make their own assessments of the implications of the scheme, seeking guidance and advice on read across risk where appropriate.
