Motor Finance Redress Scheme: What Firms Need to Know

Introduction: A Defining Moment for Motor Finance

The motor finance industry stands at a pivotal moment. The Financial Conduct Authority's review into historical discretionary commission arrangements (DCAs) has revealed widespread practices that caused significant consumer harm, and a major redress scheme is now on the horizon.

With the FCA's final decision expected by the end of March 2026 and the complaints handling pause lifting on 31 May 2026, affected firms have a narrow window to prepare. The estimated cost of redress across the industry stands at approximately £8.2 billion, representing one of the largest consumer compensation exercises in UK financial services history.

This article provides a comprehensive guide for lenders, brokers, and motor dealers on what the redress scheme entails, who is affected, and the practical steps firms must take to ensure compliance.

Understanding Discretionary Commission Arrangements

What Are DCAs?

Discretionary commission arrangements were a common practice in motor finance whereby brokers (typically car dealerships) had discretion to set or adjust the interest rate on a customer's finance agreement. The higher the interest rate charged to the customer, the greater the commission paid to the broker.

This model created an inherent conflict of interest: brokers were financially incentivised to charge customers higher rates, regardless of their creditworthiness or the rates they might otherwise qualify for.

How DCAs Worked in Practice

Under a typical DCA structure:

The lender set a minimum acceptable interest rate (the "floor rate")
The broker could increase this rate up to a maximum threshold
Commission was calculated based on the difference between the floor rate and the rate actually charged
Customers often had no visibility of the broker's discretion or the commission structure

For example, a customer with excellent credit might qualify for a 5% interest rate but be charged 9% because the broker exercised their discretion to maximise commission. The additional 4% translated directly into higher payments for the customer and higher commission for the broker.

The FCA's Intervention

Recognising the harm caused by these arrangements, the FCA banned discretionary commission models from 28 January 2021. However, this ban applied only prospectively. The regulator's subsequent review examined agreements entered into before this date, uncovering the scale of historical harm.

Scope of the Redress Scheme

Time Period Covered

The redress scheme covers regulated credit agreements entered into between 6 April 2007 and 28 January 2021. The start date aligns with when the Consumer Credit Act 2006 provisions came into force, bringing motor finance under FCA (formerly FSA) regulation.

Some agreements entered into after January 2021 may also fall within scope if they were variations or renewals of earlier DCA-affected agreements.

Affected Products

The scheme primarily covers:

Hire purchase (HP) agreements for motor vehicles
Personal contract purchase (PCP) agreements
Conditional sale agreements for vehicles
Some personal loans used for vehicle purchases where DCAs applied

Agreements not involving discretionary commission structures are outside the scope of the redress scheme.

Estimated Impact

The FCA's analysis indicates:

Approximately 11.7 million agreements may be affected
Average redress per affected agreement: £700
Total industry redress estimate: £8.2 billion
Affected firms: Several hundred, including major banks, specialist motor finance providers, and captive finance arms of vehicle manufacturers

The £700 average masks significant variation. Some customers may receive modest sums, whilst others who were charged substantially higher rates could receive several thousand pounds.

Who Is Affected?

Lenders

Motor finance lenders bear primary responsibility for redress. This includes:

High street banks with motor finance divisions
Specialist motor finance companies (both UK and overseas-owned)
Captive finance providers (manufacturer-affiliated lenders)
Building societies that offered motor finance
New entrants that acquired legacy portfolios

Lenders must identify affected agreements, calculate redress, and make payments to eligible customers. They may have contribution arrangements with brokers, but the customer-facing obligation rests with the lender.

Brokers and Dealers

Motor dealerships and independent brokers who operated under DCA structures face significant scrutiny:

Liability exposure where lenders seek contribution or indemnification
Regulatory investigation into historical sales practices
Reputational risk from association with consumer harm
Ongoing compliance obligations under the complaints handling regime

Brokers should review their agreements with lenders to understand their contractual exposure and prepare for potential contribution claims.

Credit Intermediaries

Firms that acted as credit intermediaries, connecting customers with motor finance products, may have obligations depending on their historical arrangements. This includes some comparison services and lead generators.

Timeline and Key Deadlines

Understanding the timeline is critical for effective preparation.

March 2026: FCA Final Decision

The FCA is expected to publish its final rules and guidance by the end of March 2026. This will confirm:

The precise scope of the redress scheme
Calculation methodologies for redress
Timescales for firms to complete reviews
Reporting requirements
Any supervisory flexibilities

Firms should monitor FCA communications closely and be prepared to adjust their plans once final rules are published.

31 May 2026: Complaints Pause Lifts

The FCA introduced a temporary pause on the deadline for firms to respond to DCA-related complaints. This pause lifts on 31 May 2026, at which point:

The standard 8-week complaint response deadline resumes
Firms must have capacity to handle a significant influx of complaints
Customers who made complaints during the pause will expect prompt responses
The Financial Ombudsman Service (FOS) will accept referrals for complaints where firms have exceeded the response deadline

Firms that are not operationally ready by this date face substantial regulatory and reputational risk.

Subsequent Deadlines

Following the FCA's final decision, additional deadlines will be set for:

Proactive customer identification and contact
Completion of redress calculations
Payment of redress to affected customers
Regulatory reporting on scheme progress

Firms should anticipate tight timescales given the FCA's commitment to securing swift redress for affected consumers.

Complaint Handling Process Requirements

Preparing for Volume

The lifting of the complaints pause will trigger a surge in customer complaints. Firms must prepare for:

Significant volume increases: Some lenders are anticipating complaint volumes 10-20 times normal levels
Complex case handling: Each complaint requires assessment against DCA criteria and individual redress calculation
Extended handling times: Despite the 8-week deadline, complex cases may require careful analysis
Customer communication: Clear, empathetic communication explaining outcomes

Operational Readiness

To handle the anticipated volume, firms should:

Resource appropriately: Hire and train additional complaints handlers
Develop decision frameworks: Create clear criteria for assessing complaint eligibility
Build calculation tools: Automate redress calculations where possible
Establish quality assurance: Implement robust QA processes to ensure consistency
Prepare template communications: Draft customer-facing letters explaining outcomes
Plan for escalations: Prepare for FOS referrals and complex cases

FOS Readiness

The Financial Ombudsman Service has been preparing for a substantial increase in motor finance cases. Firms should:

Understand the FOS approach to DCA complaints
Prepare comprehensive case files for potential referrals
Allocate resource for FOS liaison and case management
Consider the commercial impact of potential FOS decisions

Calculating Redress

The Basic Principle

Redress aims to put the customer in the position they would have been in had the DCA not existed. In practical terms, this means calculating:

The rate the customer would have received absent broker discretion (typically the floor rate)
The rate the customer was actually charged
The excess interest paid over the life of the agreement
Compensatory interest on overpaid amounts (typically 8% simple)

Calculation Challenges

Firms face significant practical challenges in calculating redress:

Historical data availability: Records from 2007-2015 may be incomplete or inaccessible
Agreement variations: Customers who varied or refinanced agreements require careful analysis
Part-exchanges and settlements: Early settlements, voluntary terminations, and part-exchanges complicate calculations
Deceased customers: Estates of deceased customers may be entitled to redress
Untraceable customers: Tracing customers from agreements potentially decades old

Methodology Decisions

Firms will need to make and document methodology decisions including:

How to handle missing data (e.g., default assumptions)
Treatment of compound vs. simple interest calculations
Approach to borderline cases
Thresholds for de minimis payments

The FCA's final rules will provide guidance, but firms should begin considering their approach now.

Preparing for Regulatory Scrutiny

FCA Expectations

The FCA will expect firms to demonstrate:

Proactive identification: Firms should not wait for complaints but should identify and contact affected customers
Fair treatment: Redress calculations should be fair, with the benefit of doubt favouring consumers
Timely resolution: Swift payment of redress once calculated
Clear communication: Transparent explanations to customers about their entitlements
Robust governance: Senior management oversight of the redress programme

Governance and Oversight

Boards and senior management should ensure:

Clear accountability: A named senior manager (likely the SMF16 or SMF17) is accountable for the redress programme
Regular MI: Board-level reporting on programme progress, volumes, costs, and issues
Risk management: Identification and management of operational and financial risks
Resource adequacy: Sufficient budget and headcount allocated to the programme
Quality assurance: Independent review of redress decisions and calculations

Documentation

Firms should maintain comprehensive documentation of:

Decision-making rationale for methodology choices
Quality assurance findings and remediation
Customer communications and outcomes
Escalations and complex case handling
Regulatory interactions and correspondence

Financial Provisioning

Balance Sheet Impact

The estimated £8.2 billion industry cost has significant implications:

Provisions and reserves: Firms must assess and book appropriate provisions
Capital adequacy: Consider impact on regulatory capital ratios
Going concern: For smaller firms, the redress cost may raise viability questions
Audit implications: External auditors will scrutinise redress provisions

Cost Recovery

Some firms may have contractual rights to recover costs from brokers or other parties. However:

Many dealerships that operated DCAs may no longer exist or lack resources
Contractual indemnities may be time-barred or subject to dispute
Recovery processes will take time and may not offset immediate cash requirements
Attempting to pass costs to customers would attract severe regulatory consequences

Firms should take legal advice on contribution and recovery options whilst ensuring customer redress is not delayed.

Consumer Duty Implications

Alignment with Consumer Duty

The motor finance redress scheme operates alongside Consumer Duty requirements. Firms must ensure:

Good outcomes: The redress process itself must deliver good outcomes for affected customers
Clear communications: Customers must understand their rights and the redress process
Appropriate support: Vulnerable customers require additional support in navigating the process
Fair treatment: No barriers that prevent entitled customers from receiving redress

Ongoing Monitoring

Consumer Duty requires firms to monitor outcomes from the redress process:

Are customers receiving entitled redress promptly?
Are communications clear and accessible?
Are vulnerable customers being identified and supported?
Are there any unintended barriers to redress?

Practical Steps for Firms

Immediate Actions (Pre-March 2026)

Assess exposure: Identify all potentially affected agreements and estimate redress costs
Secure data: Ensure historical records are accessible and complete
Build operational capacity: Begin recruiting and training complaints handlers
Develop systems: Build or procure calculation tools and case management systems
Establish governance: Appoint accountable senior managers and establish oversight structures
Engage legal advisors: Understand contractual rights and potential liabilities
Brief the board: Ensure senior management understands the scope and implications

Post-Decision Actions (April-May 2026)

Finalise methodology: Align calculation approaches with FCA final rules
Test systems: Ensure operational readiness before the complaints pause lifts
Train staff: Ensure handlers understand the rules and can apply them consistently
Prepare communications: Finalise customer-facing materials
Establish FOS protocols: Prepare for Ombudsman engagement

Ongoing Programme Management

Monitor volumes: Track complaint volumes against forecasts and adjust resources
Quality assurance: Regularly review decisions for consistency and accuracy
Report progress: Provide regular updates to boards and regulators
Address issues: Respond promptly to emerging problems or bottlenecks
Engage constructively: Maintain open dialogue with the FCA and FOS

How MEMA Can Help

The motor finance redress scheme presents significant operational, financial, and regulatory challenges. At MEMA Consultants, we have deep expertise in consumer redress programmes and can support firms through every stage of the process.

Our motor finance redress services include:

Exposure assessment: Comprehensive analysis of your potentially affected portfolio and estimated redress costs
Operational design: Design and implementation of complaints handling processes, systems, and controls
Methodology development: Robust, defensible calculation methodologies aligned with FCA expectations
Governance frameworks: Board reporting, MI design, and senior management accountability structures
Quality assurance: Independent review of redress decisions and calculations
Regulatory engagement: Support for FCA and FOS interactions
Consumer Duty alignment: Ensuring your redress programme meets Consumer Duty expectations
Training: Upskilling your team on DCA complaints handling and redress calculations

With the FCA decision imminent and the complaints pause lifting in May, the time to prepare is now. Firms that act early will be better positioned to manage the operational surge and demonstrate to the regulator that they are treating affected customers fairly.

Ready to prepare for motor finance redress? Contact our team to discuss how MEMA Consultants can support your redress programme.

This article is intended for general information purposes only and does not constitute legal or regulatory advice. Firms should seek professional guidance tailored to their specific circumstances.